The Department for Work and Pensions has announced plans to consolidate small deferred pension pots worth less than £1,000.
In a paper ‘Ending the proliferation of deferred small pots’, Minister for Pensions Laura Trott said the rapid growth of deferred small pots had been a long-standing issue that had presented huge challenges to the Automatic Enrolment pensions market.
The number of small pension pots has increased rapidly in recent years as a result of auto-enrolment and a lack of engagement by savers with pensions.
Laura Trott, Minister for Pensions, said: “Without intervention it is anticipated that deferred small pots will result in wasted administration costs of a third of a billion pounds per year by 2030 for pension schemes, severely reducing the value for money they can provide to their members.
“Deferred small pots are a drag on the pension system, acting as a disincentive for members to engage in pensions, reducing buying power at retirement or in some cases results in them being lost altogether.”
In January, the DWP put out a call for evidence seeking feedback from the pensions industry on how to address the growth of small pension pots. A total of 52 responses were received, including from 19 pension scheme providers. In its latest consultation, the DWP sets out a proposed framework which will enable a small number of authorised schemes to act as consolidators.
It has put forward three options; ‘pot follows member’; ‘single default consolidator’; and ‘multiple default consolidator.’
The first option, ‘pot follows member’ will allow individuals to move their pension pot from job to job but it is a slower process and requires more transfers which may mean higher costs.
A single default consolidator will allow all small pots to be transferred to a single entity, while a multiple default consolidator involves dividing small pots amongst multiple consolidators.
Wealth manager Quilter welcomed the proposals, warning that the current system could result in pension savers with multiple small pots paying unnecessary administrative costs and providers offsetting their losses by charging higher fees on larger pension pots.
Jon Greer, head of retirement policy at Quilter, said: “Our working habits have drastically changed over the last few decades. Previously people might have had one or two jobs during their lifetime and as such one or two pensions attached to them. Now people are moving to multiple employers over the course of their working life and as a result of auto-enrolment are also building up multiple pensions sometimes with not that much in, also known as “small pots”.
“This unintended consequence can make retirement saving even more complicated and may actually cost savers money. The government are therefore understandably wanting to ensure the market is working best for savers in this regard and are laying the groundwork for a shake up to auto-enrolment and put savers at the heart of the policy.”
Greer added that any of the DWP proposals would represent a “significant alteration” in the workplace retirement saving arena and have long lasting impacts on people’s retirement savings, paving the way for “seismic change.”
Kate Smith, head of pensions at Aegon UK, commented: “The Government sees attractions in bringing together thousands or millions of small pots into one or more large consolidators. These could be existing schemes such as master trusts, or potentially FCA regulated contract-based schemes. It’s fundamentally important that automated consolidators have the highest level of value for members, and that only authorised schemes are allowed to act as automated consolidators under this process. This will protect members from being automatically transferred into poor value high-cost schemes leading to poorer member outcomes.”
Smith said the government’s decision to set the limit at £1,000 “strikes the right balance” between enabling sufficient consolidation without distorting the pensions market by removing efficient pots and improving member outcomes.
However, Smith said there needed to be greater encouragement for savers to engage with their pension pots.
“Having multiple authorised consolidators could achieve significant scale quickly, depending on the number of consolidators, making investment in a wider range of assets more viable, including productive finance. But this shouldn’t be the only driver.
“Having a strong authorisation regime focussed on value for money and encouraging engagement to prompt members to take more active decisions on investment choice and contribution levels throughout their working lives is key. We need to avoid the risk of automated consolidators becoming pension holding pens with little ongoing investment in member engagement tools and support to help them make active decisions,” she added.
