Small pension pots will follow workers, says DWP
This comes after the government consulted on small pots in December 2011, during which the DWP proposed two models for small pot consolidation.
The other proposal was to create a system where small pots automatically moved into a central aggregator fund, with the National Employment Savings Trust (NEST) touted as a possible consolidator.
DWP figures claim that with the introduction of auto-enrolment and the possible banning of short service refunds, 50 million pension pots could sit dormant by 2050.
The department said that pot-follows-member will give “far greater levels of consolidation” and will halve the number of dormant pots by 2050.
It also claimed the model will reduce administration charges in the long-term.
Pensions minister Steve Webb (pictured) said: “We need a system where people build up worthwhile pension pots in one place rather than having lots of small pots all over the place, but at the moment every time someone moves to a new job there is a risk that they leave behind a small pension pot which they lose track of.
“Our plans will mean that individuals get better value for their savings and bigger pensions as a result.
“Auto-enrolment will help millions of people save into a pension, with a contribution from their employer.
“Our overall goal of getting millions more people saving would be completely undermined if people are let down by a set of rules that mean people lose track of money saved and miss out on vital income in retirement.”
The DWP has not published specific plans on how the new system will work.
Industry figures have expressed concerns about the system, arguing that automatically transferring pots could mean some savers lose valuable aspects such as guaranteed annuity rates without taking advice.
Others proposed that rather than a central aggregator fund or pot-follows-member, the DWP could create a virtual aggregator, where savers are able to see all of their pension pots in one place and take advice on consolidating them if they wish.
Otto Thoresen, director general of the Association of British Insurers, said: “Our consumer research tells us emphatically that people want to be able to take their pension pots with them as they move jobs.
“We are pleased that the government, after considering all the issues, has announced its intention to develop a ‘small pot follows member’ design. This will reduce the number of lost or stranded pots and give people greater choice as they will have a larger pot when buying a retirement income.”