What elements are needed to tackle the issue of small deferred pension pots that could reach 27m by 2035? Some say the UK’s lack of a central platform, uniform data standards and a national digital ID could hamper the effectiveness of the solutions that are being proposed by government. 

 

Small pension pots are a growing problem for the pensions world. On the provider side, they are expensive to administer where a percentage fee is charged, while on the side of the saver, there is a risk that the pot is depleted – or nearly since the de minimis of £100 became effective a year ago – through flat fees. There is also a risk that a small pension pot is forgotten and lost to the saver. 

 

 

In January this year, the Department for Work and Pensions published a call for evidence focussing on two automated consolidation options, one being a default consolidator, the other a pot follows member, a model which was proposed in 2012 but then shelved in 2015. 

 

Louise Davey, the Pensions Regulator’s interim executive director of regulatory policy, analysis and advice, said at a conference by the Pensions Administration Standards Association on 2 May that small pots are currently a big area of focus for the regulator, noting that pension scheme consolidation will further help to address the issue. 

 

However, Daniela Silcock, who heads up policy research at the Pensions Policy Institute, pointed to PPI research about other countries, which found such solutions work best with a central platform for data sharing – in the UK that would be between HMRC and pension schemes. Data standards and a robust ID number are also typically used – none of which currently exist in the UK. Several countries have an automatic transfer system, including Australia, New Zealand, Chile and Mexico. 

 

    

“I know that’s not necessarily on the cards because it would be an incredibly expensive process to set up, and also a lot of other countries have done this by taking a levy from industry that maybe isn’t affordable at the moment – but is TPR aware... not having a centralised data platform and national ID number are going to hold us back?” Silcock said. 

 

Davey noted that such options would require legislation that would need to come from the DWP, and that these questions have been discussed as part of the DWP’s consultation. DC consolidation would help stem make tracking and matching easier and more achievable, she said, but admitted that dealing with existing small pots required another solution.  

 

“I think we’re probably at the start of the journey now,” Davey said. “We want to try and stop the number of small pots growing, but there is probably a big piece of work to do to look at the stock that’s already there, and there might be different solutions for different parts of that journey. But we recognise the issue.” 

 

 

Speaking to mallowstreet, Silcock said a system to address the small pots problem can be introduced without a central platform, national data standards or a national ID system. 

 

However, “the absence of these is likely to lead to more mistakes, as it will be trickier to ensure money is being paid to the correct account. Transfers will take longer, because of identification and matching difficulties, and transfers will be more expensive, as they will require more resources,” she said.  

 

If the UK ever wanted to introduce an automated system where people could push a button to consolidate or transfer pots, all three of the currently non-existent design elements would need to be present, she argued. 

 

 

Pension schemes are currently in the process of preparing for connection to the pensions dashboards architecture – could aspects of the dashboard perhaps be used for large-scale automated small pots transfers? 

 

Silcock said one of the valuable aspects of the dashboard is that it requires schemes to submit data in a uniform way, which could be the first step towards national data standards, something that would have required significant investment from schemes.  

 

“The dashboard will provide a valuable tool for individuals to understand their pensions and saving entitlement. If the data and ID system is developed further, it’s feasible to think that one day the dashboard could provide facilities to transfer or consolidate pots with the press of a button,” she observed, although there is currently no facility like this planned for the dashboard.  

 

 

The two solutions being consulted on by the DWP – a default consolidator or pot follows member – both have advantages, Silcock said. 

  

“A consolidator is tidier and avoids people transferring in and out of the same scheme when they change employers,” she said. However, the existence of a consolidator can be harmful to master trusts through permanently transferring money out and could be administratively complex for schemes, she added.  

 

A consolidator also does not eliminate the risk that pots remain unclaimed. In Australia, deferred pots below a certain level belonging to those over state pension age are automatically transferred into their bank accounts, Silcock said, suggesting that “something similar could be introduced for small deferred pots here”. 

 

Pot follows member ensures that a member is always contributing into their full pot and does not require employers to contribute to multiple schemes, said Silcock, but “transferring frequently can be expensive for members, and there are risks attached to being transferred out of an advantageous scheme into a less advantageous one”. 

 

    

What do you think – should the small pots solutions proceed without a central platform, data standards or national ID system?