UK - The National Association of Pension Funds and the UK's trade union federation have called on the government to reconsider the use of its preferred 'pot follows member' approach when dealing with small pension pots.

Signed by the NAPF's chief executive Joanne Segars, outgoing TUC general secretary Brendan Barber, charity Age UK and consumer advocacy group Which?, a letter to national newspaper The Telegraph came the day after the Department for Work and Pensions (DWP) sought to justify its decision for 'pot follows member' over aggregator funds, the NAPF's preferred policy, by releasing its cost estimates for each approach.

In the letter, signatories said increased pension saving as a result of automatic enrolment risked leaving a "trail of pension pots" containing only a few hundred pounds.

They added that they agreed that a solution for dealing with small defined contribution (DC) pots was needed, but disagreed with the DWP's approach.

The letter said: "The government solution, where the pot follows an employee who moves job, is impractical and risks reducing individuals' retirement income."

It also echoed previous concerns voiced by the NAPF that automatic pot transfer into an employer's own pension fund - rather than into a selected aggregator scheme - risked exposing members to higher charges and weak governance structures.

Signatories added that there would be "significant" administration costs resulting from the 'pot follows member' approach.

"We welcome the government's efforts to address this problem, but this proposal risks damaging retirement savings," the letter said.

We urge the government instead to consider alternative models for automatic pension transfers."

The NAPF has repeatedly spoken in favour of appointing an aggregator scheme to receive any inactive small pots.

However, the DWP has argued that appointing one or many aggregators risks creating market-dominant schemes.

This concern was echoed in an analysis published yesterday by the department.

Assessing the impact of both 'pot follows member' and the use of aggregator funds of varying sizes, the DWP said: "For any given pot size limit, administrative savings are lower and take longer to materialise under an aggregator scheme.

"Even under the best-case scenario - where pots are aggregated into a large existing scheme - it is estimated that an aggregator scheme achieves only around a half of the estimated net present value of automatic transfers to the new employer's scheme."

The department's analysis argued that the benefits of an aggregator approach would be evident only once a member had amassed "a large number" of dormant aggregator pots.

It said: "The aggregator scheme achieves no consolidation when (and for as long as) individuals have only one dormant pot below the pot limit.

"Where this is the case, they will be left with a dormant pot in the aggregator (rather than having it consolidated into their current scheme)."

The analysis further speculated that the aggregator approach could in fact increase the number of dormant pension pots, citing the example of an employee leaving a company for a period, and then returning and resuming saving into said pot, rather than having the dormant, aggregated pot.

"Overall, the results of the DWP's modelling suggest that, for any given pot size limit, the aggregator scheme will achieve slightly less consolidation than automatic transfers to the new employer's scheme," the analysis said.

"An aggregator scheme is projected to make individuals retiring between 2050 and 2060 slightly less likely to retire with no dormant workplace DC pots and slightly more likely to retire with two or more dormant workplace DC pots."

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