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The industry’s small pots working group has reached a consensus and is proposing pot-follows-member, multiple default consolidators, and member exchange as possible ways to address small pots. A report is due to be published later this month.
In September 2020, the government set up a small pots working group, after it became clear that auto-enrolment would lead to a proliferation in small and micro pots. By the end of this year, the group expects there to be more than 11m small deferred pots. 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 that charge a percentage-based fee.
Rather than legislating to address the problem, the government has asked industry to come up with a solution, so in March 2021 an industry small pots group co-ordinated by the Pensions and Lifetime Savings Association and the Association of British Insurers was set up, which published a first progress report in September last year. It said 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, while solutions must allow for both ‘push’ and ‘pull’ solutions.
‘Government has no appetite for getting us out of this hole’
The group has now said that a consensus has been reached on the models that could be used to tackle the growth of small pots. Speaking at the annual conference of the Pensions Administration Standards Association on Tuesday, PASA chair Kim Gubler said the consensus was on pot follows member, multiple default consolidators and member exchange between providers.
“It’s likely the future will be a combination of all of those,” she said. A revised report will be published “sometime this month”, said Gubler, because the Department for Work and Pensions has looked at it and “made some comments”.
She said the group chose to give the government a selection of solutions: “We gave different options, but we did ask for regulatory input, because ultimately, even if industry makes a start, there has to be some form of regulatory input,” she said. The government is unwilling to legislate or provide regulations at this point, she noted, or to create a big centralised consolidator, resulting in the consensus model of multiple consolidators and pot-follows-member. “Government has no appetite for getting us out of this hole,” she said, instead expecting industry to show a willingness to tackle the problem itself.
Ruling out certain models had been difficult, she said, but that a single consolidator model is not being considered anymore, “because who is going to set it up if not government, which it wasn’t going to be”, she said.
The fact pot-follows-member is on the list means it could be introduced several years after it was shelved by former pensions minister Baroness Ros Altmann in 2015, and after encountering resistance from industry and consumer groups. In 2014, the PLSA, Age UK, EF, TUC and Which? were concerned about the proposals, writing that “the ‘pot follows member’ system of transfers has a number of inherent risks and weaknesses that must be properly considered and addressed”.
Gubler said any final solution to the small pots problem will be mindful of other initiatives that could affect it, such as regulations on flat fee charges, the stronger nudge to guidance, contract law, fair value, defined benefit transfer regulations and minimum pensions age.
Matching – easier said than done?
At the time of its first progress report, the small pots group said that further work was needed on administrative issues such as how to identify and match savers with pots and issues with data quality.
Gubler now emphasised the importance of this process, saying: “It comes back to matching. Matching small pots so that you can, whether [it’s a] push, pull or otherwise system, you have to be able to say that Joe Bloggs with £100 pounds is J Bloggs who’s got £100 to match them up.”
Although this simple principle is at the heart of big projects like the small pots group and the pensions dashboards, it is particularly difficult to implement in the UK. Technology firms have previously bemoaned the UK’s lack of a digital identification system as being a substantial hindrance to the dashboards project and greater use of data, and the same problem now faces small pots consolidation.
Independent consultant Richard Smith said experience from Australia showed that without a national digital ID there was “a limit to the success in matching”, with Australian experts saying the UK should “get a digital ID now, otherwise you might as well stop”.
Gubler questioned why national insurance numbers could not act as digital IDs but noted herself that some people have more than one number and others have none. “Any other country that does matching can identify its citizens. We don’t,” she said.
Margaret Snowdon, president of PASA, suggested that although dashboards might not cure all ills in pensions, they will focus attention on data, implying that this could lead to improvements.
“If you don’t have good data, you can’t have a good relationship with somebody because data is all we’ve got,” she said. “What scares me most is, we end up with £30bn in lost pots with no idea who that money belongs to, and the Treasury takes it all and blows it... the people who’ll benefit are not the people who paid that money in, or their employers.”
What do you think about the industry group’s proposals?