A federated design is preferable to one that requires the creation of a central clearing house for the automatic consolidation of small deferred pension accounts by 2030, Pensions UK’s feasibility review of small pots consolidation, published on Tuesday, has concluded. 

Pensions UK commissioned the review at the request of the Department for Work and Pensions, to assess whether a data platform can be delivered to support the government’s multiple default consolidator model.   

A model where providers can communicate directly through existing open standards and messaging frameworks could be delivered “primarily through a service-provider led model similar to the one connecting thousands of schemes to the dashboards ecosystem” and would save the huge costs and timescales involved in building a clearing house, the report said.  

“This avoids single points of failure and provides each scheme and consolidator with operational autonomy, provided consistent standards are followed,” it noted.  

The pensions industry would still need to undertake development and roll out compliant connection solutions in a federated design, just as it would have to do on a centralised model, however, which would be on a similar scale of development to that carried out for pensions dashboards. 

Executive director of policy and advocacy at Pensions UK, Zoe Alexander, said: “This Review shows that a practical solution to combine millions of small pension pots is within reach — one that delivers value for members, enables schemes to operate effectively, and ensures policy objectives are met. By working together, government, regulators, and industry can deliver consolidation in a way that is efficient, fair, and beneficial for millions of savers.” 

  

Pensions minister for Torsten Bell said: “With more small pots than pensioners in the UK, too many people are losing track of their hard-earned savings. This is bad for pensions savers and bad for the pensions system. I welcome this report which underlines our commitment to working with industry to fix that. Alongside progress on dashboards, tackling small pots is a crucial step to help millions of people stay connected to their savings and improve their retirement security.” 

The federated model has been proposed as the review found no industry appetite to take on the centralised role. Central builds are costly and complex, the reviewers noted, particularly when they involve sensitive personal data and multiple commercial and non-commercial stakeholders, meaning it could take many years for the policy to be deliverable. 

The study estimates total ongoing costs of operating a federated model across five consolidators at £2m to £3m a year and across all other ceding schemes at £5m to £10m. It estimates SWIFT costs for message transmission would be £8m for stock assuming a start date of 2030 and £300,000 a year for flow.  

A second phase of work will be required to refine technical standards, governance arrangements, consumer protections, and implementation phasing of the federated model, aligned with the passage of secondary legislation, Pensions UK said. 

  

Philip Brown, director of policy and public affairs at Nest, one of the sponsors of the review, said: “We look forward to the next phase of work which will be to tackle the key questions around regulation, governance, and standards, to make sure the system works smoothly and delivers the best outcomes for savers.”   

  

The Small Pots Feasibility Review shows that the automatic consolidation of small, deferred pension pots is viable, said Angela Staral, chief operating officer at People’s Partnership.  

 

“Now it’s time for government and the wider pensions sector to deliver this reform and resolve the small pots problem in the interests of pension savers and their financial wellbeing in retirement,” she added.