Risk of pensions failing ‘far greater than regulator assumes’

Analysis reveals that government’s “pot follows member” scheme could wipe up to 25% of value off some pensions

The risk of pensions not paying out is far greater than regulators have assumed, and an extra 30 years may be needed to “de-risk” them, the Financial Times has reported, as unions warned that workers who take their pensions with them to new jobs risk losing up to a quarter of their funds under government plans.

Ministers say the “pot follows member” scheme could halve the number of dormant pension pots that would have otherwise been created by 2050. But a letter to the Daily Telegraph, signed by the National Association of Pension Funds’ chief executive Joanne Segars, TUC general secretary Brendan Barber, Age UK charity director general Michelle Mitchell and Which? chief executive Peter Vicary-Smith, claims that the plans would see money being transferred from good schemes with low fees to poor schemes with high fees.

The alliance wants retirement savings pooled cheaply in one place, giving clarity for savers. The difference between low-cost “aggregator schemes” and the government’s plans could be up to 25%, they say.

“We agree with the government that a system to automatically transfer these small pots is necessary. It is vital that savers are able to get maximum value from even small amounts of savings.

“However, the government’s solution, where the pot follows an employee who moves job, is impractical and risks reducing individuals’ retirement income. Pots could be transferred into poorly managed schemes, with high charges and low investment returns.”

Unless the current system is changed, some 50m pension pots could be sitting dormant by 2050, the government estimates, and more than 12m of these will be worth less than £2,000.

Under the current system, people need to take more active steps to consolidate their savings, meaning that smaller pension pots can be left stranded with a string of employers. Estimates have already put the total value of unclaimed pensions at around £3bn.

Concerns have been raised that the number of dormant pots could sharply increase following a landmark scheme to automatically enrol up to 10 million people into workplace pensions which were launched recently.

According to the analysis by the consultancy Towers Watson, final salary schemes, which offer a fixed annual pension, are far more exposed to volatile markets than has previously been calculated.

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