The growing number of small pension pots is one currently being addressed by a Department for Work and Pensions’ consultation ‘Ending the proliferation of deferred small pots’, which closed at midnight on 5 Sept. The government’s preferred solution has not found favour within the industry.
Individuals can accrue a number of pension pots as they change jobs over the years and auto-enrolment has exacerbated this situation. The DWP estimates that there are roughly 20 million pots worth less than £10,000 (of which 12.1 million are below £1,000), with a total value of around £30billion in assets.
These are costly for the industry to administer and risk being lost. The government launched its consultation to find a way to address the issue. Invariably, this will require moving assets within the industry.
The government’s preferred solution is to encourage a small number of existing large schemes, specifically master trusts, to apply to become authorised default consolidators for small pots valued below £1,000. However, Kate Smith, head of pensions at Aegon, said this suggestion is “fraught with complexity and cost” and has called for greater considerations to be given to other solutions including ‘pot follows member.’
Smith said: “A major barrier to any automated small pots solution is the total scheme cost of making pension transfers, which varies by scheme between £30 and £80, as indicated in the consultation paper. Until these costs are eliminated, and truly automated, with no human intervention, and communications fully digitalised, it’s hard to see any small pots solution being achievable or cost-effective.”
Smith has urged the government and regulators to work with the pension industry to investigate ways to reduce transfer costs before forging ahead with any small pots solution.
She continued: “Small pots consolidators will have to demonstrate the highest value for the member under the proposed value for member framework. The framework, once in place, will naturally drive consolidation into larger schemes providing better value for money. Surely it makes sense for scheme consolidation to happen before attempting consolidation of small pots at individual level. The concept of attempting individual and scheme consolidation at the same time is highly problematic. It makes no sense for a scheme to be a small pot consolidator if it is then, or becomes, at risk of being wound-up or consolidated if it offers poor value.”
For Smith, the DWP should focus upon the value for money framework and the pensions dashboard. The government’s own analysis of the Mansion House pension reforms shows that for a median earner, the proposed small pots model will only lead to a small increase in pension pot size of around £700 at age 65, compared to an increase of over £11,000 following the implementation of the value for money framework and £34,700 for implementing the 2017 reforms to auto-enrolment.
“This is where the energy and resources should be directed, to really make a difference to member outcomes,” she added.
Jamie Jenkins, director for policy and communications at Royal London, echoed the sentiment: “It’s good to see the desire to conclude the longstanding debate on deferred small pension pots. However, the default consolidator model is likely to be confusing for savers and fiendishly complicated to implement. We would like to see the role of the Pensions Dashboard and its architecture at the heart of any solution, alongside a reconsideration of the ‘Pot Follows Member’ approach, which feels eminently more intuitive for savers.”
The DWP is also exploring what support and decumulation products are currently on offer to members and what may be offered to them in the future, with 26.3 million people now members of a defined contribution scheme.
Jon Greer, head of retirement policy at Quilter, said with the consultation closing, the private pensions landscape is at a “defining juncture.”
Greer said: “It’s clear that trustees need to be at the forefront, proactively offering solutions and the results of this consultation will hopefully help them do so. Ultimately, the ideal approach should empower members to opt for lump sums, annuity purchases, drawdowns, or a blend of these.”
However, Greer warned that the option for trustees to partner with providers is “overly complex” and said it raises a question mark over liability should a consumer be dissatisfied with a partner selected by the Trustee.
Greer said: “At which point does the trustee’s responsibility end and the partner’s commence – ultimately will this be determined via the Ombudsman in the future?
“One aspect is unmistakably clear: if trustees collaborate with a provider for decumulation, it essentially translates to an ‘in-house’ provision from the members perspective. Members are likely to gravitate towards this default, potentially side-lining the broader market. While some argue that a competitive market would naturally form through providers vying for business, once established, where’s the incentive to stay competitive?”
Greer said the DWP should focus on a more streamlined solution, potentially including a mandated approach for all DC members to attend Pension Wise appointments or use online tools to assist their journey.
