The Minister for Pensions Steve Webb has announced that the Department for Work and Pensions (DWP) will create an automatic transfer system for small pots of less than £10,000, allowing workers to take their pensions with them when changing employer, thus encouraging the consolidation of a “big fat pot”.

A command paper entitled Automatic transfers: Consolidating pension savings’ has been laid before parliament and the proposal will be included in the forthcoming Pensions Bill.

According to DWP official figures, by 2050, the automatic enrolment process will have created up to 50 million dormant pension pots and therefore the DWP has stated that “automatic transfers will help to consolidate pension savings into an individual’s current employer’s scheme,” making it easier to track them, securing a better income in retirement and will help to avoid higher charges on pots to which they aren't contributing.

Under the latest proposals, automatic transfers will only take place between money purchase schemes and will apply to all members in workplace pension schemes who are workers. Furthermore, the DWP announced that a pot will be eligible for automatic transfer either once all the contributions have ceased and the individual has left employment or once all contributions have ceased for a certain period. Members will have the option to opt out of the ‘pot-follows-member’ process if they wish to leave their pot with a previous employer’s scheme.

By initially proposing a pot size limit of £10,000, the DWP has estimated that this would achieve “reasonable consolidation” by leaving “only around 1 in 30 of those retiring between 2050 and 2060 with five or more dormant pots.” In addition it stated that a £10,000 pot size would achieve a 50 per cent reduction in the number of dormant pots by 2050 and administrative savings totalling £6.4bn by 2050.

The government also announced plans to withdraw short service refunds for those in money purchase schemes and this will take effect from 2014.

Webb stated: “Instead of having lots of small pension pots all over the place, we want people to have a 'big fat pot' which will buy them a better pension. We want to make it the norm that when you move job your pension rights can move with you if you wish. This will reduce the costs of providing pensions and will help people to be much more engaged with their pension savings.”

Industry figures have all been quick to react to the news. Some warned that a lot of work still needs to be done to ensure the process is a success. Aegon regulatory strategy manager Kate Smith said: “Setting a limit of £10,000 for auto-transfer of auto-enrolment funds is realistic. The next step is to decide on the most effective infrastructure for making this happen. It will be far from straightforward and we need to get this right for all sectors of the DC pensions industry – self-administered schemes as well as insured."

PwC pension partner Peter McDonald said: “This is great news for savers. With the average person having six jobs before they are 30, this new system will go some way to reducing the sheer amount of money that is left unclaimed in forgotten pension schemes.”

CBI director of employment and skills Neil Carberry stated however that the “devil lies in the detail”. He argued: “Businesses would have preferred a virtual aggregator to an automatic transfer system. This would have been easier to implement and, crucially, avoided the risk of member detriment.”

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