The government has been urged to consider a ‘magnetic pensions’ model to address the small pots issue, after analysis from LCP suggested that over two million new pension pots are ‘left behind’ each year as people change jobs and start a new pension.

The government previously confirmed that it would be moving forward with its plans to introduce the multiple default consolidator model for defined contribution (DC) schemes, as well as exploring plans to give ‘member choice’ in workplace pensions.

However, LCP argued that there are “serious problems” with the government’s proposed approach, warning that the proposed changes would prompt a big increase in the cost of providing pensions, as new computer systems would be needed to consolidate micro pots and to facilitate member choice, whilst employers would face increased costs as they had to send pension contributions to different schemes for each worker.

In addition to this, LCP said there is a risk of members making poor choices as they may find it hard to compare multiple past pension providers and choose which one was the best, with savers at risk of being “bombarded” by marketing as providers competed for their business.

Given these concerns, LCP argued that the government should consider a simpler alternative to solving these problems, which it has called ‘magnetic pensions’.

This would mean that each time a person changes job, their past pension would be ‘magnetically attached’ to them and move with them to their new job, where it would be combined with their new workplace pension.

Small pots would continue to be combined in this way until the worker had accrued a decent single pension pot at which point the automatic transfer of pensions would cease.

Workers would also be free to opt out of this process at any point if they wanted their pension pot to remain where it was.

The proposals build on the 2014 Pensions Act proposal for a ‘pot follows member’ solution, as well as making use of the infrastructure provided by the Pensions Dashboard Programme, which is due to go live in the next few years.

Commenting, LCP head of DC pensions, Laura Myers, said: “With over 2 million new pension pots being left behind each year as people change jobs, we urgently need a solution to the problem of small pension pots.

“But the government’s plans are complex and expensive and will take years to implement. Worse still they may lead to worse outcomes for many ordinary pension savers.

“We are advocating a much simpler and more cost-effective solution which keeps the best features of automatic enrolment, such as a single pension scheme in each workplace, but makes sure that people do not reach retirement with large numbers of small pension pots.

“We hope that the next government will think again about the current direction of policy and instead deliver a solution which pension savers will understand and which will deliver the best outcomes for people on average and lower incomes”.

Adding to this, Royal London director of policy and communications, Jamie Jenkins, said: “This is an eminently sensible proposal which would be easily understood by savers as they move from job to job, bringing their small pension pots with them.

“While it might not have been the right time to implement this during the phasing of automatic enrolment, ‘pot follows member’ should now be revisited, having identified the serious challenges with other proposals.”

---