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The small pots industry working group, set up to find a solution to the proliferation of small deferred pension pots, has published its first progress report, showing it hopes that mass-scale consolidation can be implemented from 2025/26 onwards.
The Pensions Policy Institute predicts there could be 27m small pots in master trusts alone by 2035, which risk being forgotten about by savers, eroded by fees and expensive to administer for providers. The issue is the result of a previous decision by the DWP to shelve pot-follows-member following industry pressure.
To tackle the growing small pots problem, a group was jointly convened a year ago by the Pensions and Lifetime Savings Association and the Association of British Insurers after the Department for Work and Pensions batted the ball back into the industry’s court. It has begun work to consider the administrative groundwork that would be needed to progress potential solutions, such as auto-consolidation, which were proposed by the DWP’s own working group last December.
Solutions must be holistic and balanced
The PLSA said the industry group has found that eventual solutions must address the existing stock of small pots but also stem the flow of new small pots, and work for both trust and contract-based pensions and their different regulatory frameworks.
The group argued that solutions must allow for ‘push’ solutions, which allow pension providers to consolidate pots, as well as ‘pull’ solutions, which will let savers find and consolidate pots on their own.
Any potential saver benefits “must be balanced against the potential saver detriments of an automatic small pot consolidation solution”, the PLSA added.
Further work is needed on administrative issues such as how to identify and match savers with pots and issues with data quality, the group said, noting that some regulatory changes might be necessary if a cost benefit analysis supports this.
Will we see new legislation?
The group’s roadmap shows it is hoping to have legislation and a mass scale implementation solution in 2025.
Pensions minister Guy Opperman said he was pleased to support the publication of the small pots co-ordination group report, but appears keen for further progress to be made without the need for new legislation.
“This report enables us to further understand the positive progress that is being made by the small pots industry group to tackle the administrative challenges of deferred small pension pots. I encourage the industry to continue in their efforts to understand how far they can progress consolidation solutions within the existing legislative framework,” he said.
Andy Cheseldine, who chairs the Small Pots Co-ordination Group, said he believes the group has enough evidence to get started on solutions. “Further research will let us hone our recommendations and provide the complete evidence necessary to justify any new regulatory or legislative changes,” he added.
Joe Dabrowski, deputy director of policy at the PLSA, said small pots are a complex problem but one that must be solved sooner rather than later.
“We’re incredibly pleased by concerted effort across the industry, and ongoing support from DWP and regulators to find and enact solutions, including legislative fixes that can be applied across the sector,” said Dabrowski.
Head of retirement savings at the ABI, Rob Yuille, said the report provides a good base for the next stage of the project – which will include “building the evidence base for future legislative changes to implement mass market automatic small pot consolidation”.
Auto-consolidation finds industry support but raises liquidity questions
This push for auto-consolidation appears to reflect a very different view from what is currently the tenor on the dashboards project, where saver protection has been cited as the main reason why savers will not be able to consolidate pots on the dashboard. Some might wonder why providers should be better placed to act in savers’ interests than savers themselves.
The potential introduction of auto-consolidation also raises questions about liquidity in defined contribution pension schemes, where the Treasury is pushing for changes to facilitate investments in illiquid assets. While it could create greater scale, it will also require funds to hold sufficient liquidity to transfer pots.
The Investing and Saving Alliance has endorsed the report, and agreed that providers should be able to automatically transfer members’ small pots when they change jobs, particularly given the low consumer engagement with pensions. Before legislation can be changed however, a low-cost, at scale transfer system must be available, it agreed with the report.
“We are pleased to see that the findings from the DWP working group last week have been taken forward," said TISA’s chief operating officer Carol Knight.
“We believe that, with full collaboration between the government and the industry, a robust and effective framework can be created to facilitate the consolidation and transfer of small pots,” Knight added.