Need to know:
- As individuals increasingly hold multiple jobs throughout their working lives, they may be at risk of missing out on retirement income if previous pension pots are forgotten.
- Consolidation can give employees a full overview of their retirement savings in one place, and may offer lower charges and better tools than previous arrangements.
- Employers can support employees through the process by offering guidance and information, or signposting them to where they are able to access advice.
The average employee will hold multiple jobs in their lifetime, potentially collecting pension pots from each of their employers. If these are left untouched, employees risk losing a valuable part of their retirement income. A study of defined contribution (DC) pensions conducted by the Pensions Policy Institute (PPI) for the Association of British Insurers (ABI) in October 2018 found 800,000 lost pensions worth an estimated £9.7 billion.
As it becomes increasingly the norm to move between multiple employers in the course of a career, and with the introduction of auto-enrolment meaning more people are paying into pensions than ever, employers need to be able to help staff to consider their options for consolidation.
Linda Whorlow, managing director at Aegon Workplace Investing, says: “The whole area of consolidation is a really big issue now. The number one question that we get asked when we go on site to employers’ offices is, ‘how do I combine my pensions to bring my previous assets in?’”
Consolidation process
Consolidation is the process whereby employees move their existing pension arrangements to a new workplace provider. It can be done either individually or through a bulk transfer process, in which all members in a scheme are given the opportunity to move to a new scheme with a new provider. It is an important way in which to ensure that an individual gets the full benefit of the retirement income they have earned throughout their life, yet the details of the process are not widely understood.
Alan Morahan, managing director, employee benefits consulting at Punter Southall Aspire, says: “The opportunity to consolidate is something that quite a lot of people like the idea of, but they often don’t know how to do it. So, they view it as perhaps being very complicated, perhaps very expensive and they often don’t know the implications of doing so.”
Many DC pension providers will offer the facility to consolidate pensions, and will also do most of the work while guiding an employee through the process.
An individual can choose to move their pension pots at any time to their current scheme, but there are usually two key stages at which they will consider consolidation: at the launch phase of a new scheme, and when they are approaching retirement. The launch of a new scheme, or move to a new provider, often acts as a catalyst for an employee to take stock of their retirement savings and consider moving all monies to one pot. “The employer is advocating an upgraded new pension plan, and all of the benefits, the tools [employees] can use etcetera, and generally lower charges,” says Whorlow. “That’s a catalyst for employees wanting to move their previous benefits.”
Understanding the benefits
Auto-enrolment brought millions of new investors into pension schemes, but the passive nature of the engagement created by these reforms means that many employees are only contributing the minimum levels, which will not provide adequate retirement incomes. With that in mind, consolidating pension pots should ideally be done sooner rather than later, says Clare Reilly, head of corporate development at PensionBee: “Realistically, people need to be contributing 15% for their whole working life to be able to have a comfortable retirement, but they are not saving anywhere near enough.
“Having pots scattered around is not going to give [an employee] a clear sense of what [they] need to be doing now to have the retirement [they] want later on in life. The earlier [they] do this, the more money [they] will have in retirement.”
The option to move to a scheme with lower charges is also an attractive driver, but this should just be one consideration, says Michael Ambery, senior DC consultant at Hymans Robertson. Employees need to be aware of everything involved in a consolidation transaction, and know the key questions to ask.
“It may be advantageous because the fees that [the employee] paid in [their] previous employer’s scheme may be higher than those in the current scheme with the new employer,” explains Ambery. “If not, then the only reasons to move are because [they] want to consolidate for the point of putting all [their] eggs in one basket, or [they are] choosing how to govern [their] own arrangements and determine how to invest those arrangements, but doing it in one place. Is there value to do it, and are there any penalties to do it? Will it cost, as an individual, firstly to transition their monies across, and secondly, are there any adjustments by the provider of the pension scheme for moving that money across by way of [a] penalty, or market value adjustment?”
Key considerations
Although they cannot give financial advice or actively promote consolidation, and whether to go through the process is ultimately an individual’s choice, employers are generally seen as trusted voices, and employees will be used to receiving messages on pensions from them. This positions an employer as a useful conduit for information.
“[An employer’s] key role is to make sure that it’s high on the agenda for employees,” says Whorlow. “The common theme is [that] employers that are more actively engaged, making sure the members are aware [and] we’re targeting the right communications in the right way for [their employees]; those are the ones with the highest take-up rates. An employer that really sponsors the scheme, both financially with contributions, but also in the promotion of the scheme and making sure that it’s communicated, that reflects really well on them.”
With the long-awaited pensions dashboard unlikely to make an appearance before late 2021, employers should consider supporting the consolidation process as an element of their approach to engaging staff with retirement savings. Working closely with their pension provider on education and communication will ensure that employees take an active role and fully understand the process they are involved in.
“It [points] to financial wellbeing and care for an employee,” says Ambery. “An [employer] that maybe wants to do more [could] pick up that baton and say, ‘I want to help members make the right decision, and to be able to facilitate that’.”