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Pot-follows-member reform could hit retirement income

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by Jan Harris
Pot-follows-member reform could hit retirement income

Proposals to allow workers to move their workplace pension to a new scheme each time they move employment have been criticised by pension and consumer groups.

The Department for Work and Pensions is introducing the ‘pot follows member’ approach to avoid the potential problem of workers having several small pots when they reach retirement age, some of which they may have lost track of during their career.

However, in a letter to the Daily Telegraph, the National Association of Pension Funds (NAPF), consumer organisation Which?, charity Age UK and the TUC are calling for the plan to be reconsidered.

The proposal could result in workers who switch jobs several times losing up to a quarter of the potential value of their pension funds, the groups claim.

In their letter, the groups say: “Pots could be transferred into poorly managed schemes, with high charges and low investment returns.

“There would be significant administration burdens and transaction costs imposed on pension schemes – ultimately paid for by consumers.”

In July, the Department for Work and Pensions rejected an alternative “aggregator pot’, a large scheme with low charges into which workers would be able to place their savings from different schemes as they move jobs.

The ‘pot follows member’ proposal follows the recent introduction of automatic enrolment into a workplace pension which will boost the number of people saving into a pension scheme.

Meanwhile, the UK pension system has been ranked highly on the Melbourne Mercer Global Pensions Index, a global comparison of national pension schemes.

The UK was placed 7th in the ranking ahead of the USA, Germany and France but behind Denmark in first place, followed by the Netherlands and Australia in second and third positions.

The UK was ranked highly for integrity, which covers regulation and governance, protection offered to members, and communication with members.

It also scored highly for adequacy, which includes the base level of income provided, but continued to fall on the index for sustainability and is now below average on this measure.

Sustainability considers issues such as ageing populations, the ratio of retirees to productive workers and government debt.

The introduction of auto-enrolment is expected to improve the UK’s position on the sustainability index in 2013.

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News posted: October 16, 2012

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