Creating a simple and easy way for pension pots to automatically follow employees when they move jobs is critical to the success of auto-enrolment, Aviva has said.
Aviva has strongly supported the ‘pot follows member' approach throughout the Government consultation process. It argues that automatic transfers between schemes will make it easier for employees to manage their pension in one place, see the total value of their savings, and prevent money being lost or forgotten.
The financial services industry should now put their support behind the Government's proposals for ‘pot follows member' and agree a set of industry standards. Aviva acknowledges that safeguards need to be put in place to avoid employees giving up valuable benefits, but disagrees with criticisms that ‘pot follows member' could be impractical or risky.
‘Pot follows member' has clear benefits
Criticisms of ‘pot follows member' fail to recognise the clear benefits for employees in allowing automatic transfers between auto-enrolment schemes. The benefits include:
The value of total retirement savings can be seen in one place, encouraging improved levels of ownership and engagement.
Easy on-line access to monitor investment performance and track progress.
Always having employees' savings in an up-to-date product operated by an active scheme provider.
Modern, low-cost charging structures over the duration of an employee's working life.
Better deals at maturity - having one pension pot with which to purchase an annuity is simpler and cheaper as there are fixed costs to converting savings to retirement income, and these would apply to each pot.
‘Traffic light' code to safeguard transfers
Employees' retirement savings may also be further protected by establishing a set of specific industry standards or a ‘traffic light' code to carefully manage the automatic transfer process. A simple, clear set of rules will ensure that pension pots cannot automatically transfer if there is a possibility of significant detriment, and a traffic light approach will flag such schemes.
Aggregator approach comes with risks
Aviva has concerns that if an aggregator scheme is created it will result in a lack of diversity and competition with millions of employees' pension savings managed in a single scheme - a significant risk for Britain's workers and the UK economy as a whole.
David Barral, Chief Executive Aviva UK and Ireland Life said:
"We think the industry needs to work together on automatic transfers, as creating a simple way for employees to manage their savings is at the heart of auto-enrolment.
"The ‘pot follows member' approach makes it simple for employees to see in one place the value of the pension savings they've accrued with different employers. We believe this will encourage employees to take more interest in choosing investments and in tracking performance, particularly given how easy this is online.
"The industry should work together to agree common standards to avoid employees losing valuable benefits from previous schemes. However, there is no doubt in our minds that 'pot follows member' has clear advantages for the vast majority of the British workforce."
Summary of Aviva's recommendations:
Allow automatic transfers between small auto-enrolled pension pots to enable members' retirement savings to "follow members" when they change jobs.
Implement agreed industry standards or a code to manage the automatic transfer process between auto-enrolment schemes.
Avoid a single aggregator approach - the lack of competition and diversity will be a significant risk for individuals and the UK economy.
Aviva's preferred model for auto-enrolment schemes is a central clearing house to match the old scheme with the employee's new scheme.
Limit automatic transfers to between automatic enrolment schemes only - as they will meet minimum suitability standards and ensure adequate protection and broadly equal suitability for the consumer.
Legislate, and apply it retrospectively, to allow for automatic transfers from the start of auto-enrolment (October 2012) to smooth the way for simplifying the overall process for transferring non-auto-enrolment pension pots in the future.
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