As we approach 10 million auto-enrolees who, together with their employers, are already setting aside close to £5bn per year to fund their retirements, I have been thinking about the increasing numbers of pots which will be orphaned as people move jobs.
The average time spent at one employer is now 4.6 years. That amounts to 10 job changes in a typical working lifetime. Twenty five per cent of us will have 14 or more jobs. So, a millennial who accessed auto-enrolment early in their career is likely to be collecting (and more than likely forgetting) 10 or more pension pots over the years.
The issue has been compounded by changing government policies. Former pensions minister Steve Webb had planned a pot follows member solution, and prepared for this in 2015 by scrapping short service refunds, which removed leavers in the first two years from the system by refunding their contributions, but his successor Ros Altmann shelved the concept indefinitely later that year. So, there is little now preventing the build-up of multiple abandoned and forgotten small pots.
Indeed, the Department for Work and Pensions’ own modelling predicts more than 50 million small pots will be inactive by 2050. Of these, 12 million will be worth less than £2,000, while 33 million will be worth less than £10,000.
For those retiring in the next few years, winning the pensions consolidation game becomes a little more urgent. I would not be surprised if a Baby Boomer approaching retirement today did not have six or more pension pots. They are unlikely to be helped by the pensions dashboard anytime soon, as that initiative seems to have stalled, so they will need help to find, value and make sense of all of them.
On top of the smaller pots mentioned, people should still have the state pension, and advisers must make sure clients are not missing out on some of the lesser-known ways of topping up the entitlement. Grandparents’ credits are one example for those providing regular childcare to grandchildren to enable their children to return to work.
A lot of older clients retiring in the next few years will likely have been members of gold-plated final salary defined benefit schemes, too. At their peak in the 1970s, £9 in every £10 saved in pensions was going into a DB scheme.
Early defined contribution pensions can be almost as gold-plated as DB schemes. They often came with guarantees attached and, if the actuaries concerned priced them inadequately, as many did, they could offer very valuable guarantees today.
Give special prominence to early plans that retain guaranteed growth rates or guaranteed annuity rates.
Advisers that can help clients hold onto the right plans – explaining the often hidden value and benefits of some of those older ones – should be in high demand as Baby Boomers continue retiring in record numbers for at least a further decade.
Adrian Boulding is director of retirement strategy at Dunstan Thomas