In what sounds a sensible idea the government wants to introduce workplace pensions that follow the employee when they move to a new job.
But the real danger is that the policy will destroy pension sector competition, reduce choice and lead to institutionalised non-advised transfers of pension pots, many of which could be very sizeable.
Stephen Webb, the pensions minister, says he wants to introduce a system that would see pension pots of less than £10,000 transferred automatically on a job change 'as quickly as I can' and one can see some logic behind that. Ask any pension specialist and they will tell you that tracking down old frozen company pensions can sometimes be a problem, especially if the old employer went bust and there is a pension trustee to find (people also forget about old pensions). There is also no central register of pension schemes (data protection etc) although there is a government pension tracing service – and the fact you have to trace a pension shows the problems of having more than one occupational pension in place.
This scheme would then be extended over time to include ever larger pension pots.
But, what the government aims for is that when you move jobs the money is automatically taken out of your old pension with your old employer and put into your new employer's pension scheme. Now what happens if the new employer's scheme performance is worse than your old one? You will be forced to take a hit and may suffer down the line as a result. What if your new employer goes bust? Can you rely on future governments to bail the scheme out?
Surely, as Aviva and Hargreaves Lansdown have proposed, it would be better to let each employee have their own individual pot, which employees then to contribute to. No says the minister, that would be far too complicated for the employer to have to deal with loads of different pension providers. Hogwash! I say, that's like saying you have to change bank accounts to have wages paid in when you change employers. No, the truth as I see it is that the government wants auto-enrolment and that can only be achieved by forcing the employer to set them up. If the onus was on the employee it would be far harder for government to enforce it.
Under the government proposals we would end up with even less choice than we have now (from 'to leave it or move it with advice available from a financial adviser' to 'it will be moved') where pension providers have little incentive to compete.
The best way forward would be to allow people to set up flexible personal pensions of their own, into which employers are forced to contribute depending on how much the employee puts in from their wages. Can you imagine the competition and cost cutting as provider, just like supermarkets and insurance providers, had to fight for your business.
The looking forward, would the government (taxpayer) have to make up any shortfalls if it could be proved that the automatic transfer was detrimental to the employee? At the end of the day the question is who carries the risk of an auto-transfer system?