Consumer groups are worried that workers could lose up to 25% of their pension funds as they move from job to job under the new NEST enrolled retirement savings scheme.
Pensions minister Steve Webb has had an open letter raising the concerns from a range of pension and consumer organisations – including Which?, AgeUK, the TUC and the National Association of Pension Funds, the trade body for workplace schemes.
They are urging him to rethink his plan for portable pensions that move fund to fund as workers switch jobs.
The fear is this could leave up to 50 million dormant pension funds by 2050.
The ‘pot follows member’ plan is aimed at letting workers leave dormant pensions behind when they move to a new employer.
Pot follows member worries
The problem has arisen as the auto-enrolment scheme to encourage 11 million workers to save for their retirement has started with the largest employers and will filter down to smaller firms in the coming months.
However, the groups writing to the minister claim ‘pot follows member’ is not the right solution, as pension values could lose a quarter of their value if they are transferred out of high-return schemes in to less effective ones with low returns.
The letter says: “We agree with the government that a system to automatically transfer these small pots is necessary. However, the government’s solution is impractical and risks reducing individuals’ retirement income.”
They consider an aggregator scheme will work better than ‘pot follows member’.
Aggregators would pool retirement savings from all their jobs in a single fund at a low cost.
They calculate someone on half-average earnings saving in to a pension for 45 years would end up with a pension of £82,000 in an aggregator scheme – but £61,000 if they followed the government proposal.
NAPF chief executive Joanne Segars said: “Having a pension automatically follow people from one job to the next could create a pensions lottery that leaves many people out of pocket. Our research suggests that a string of bad moves could see people lose a quarter of their pension pot, mostly due to charges.
“The government could create a pensions lottery that leaves many people out of pocket.”
Webb dismissed their concerns and voiced his support for the portable pension plan.
“Our analysis clearly shows that ‘pot follows member’ is the best way to help people. It is time to stop debating different options and get on with making positive change for consumers,” he said.