Small pots report recommends exchange trials

Small pots report recommends exchange trials

The pensions industry should begin to facilitate mass exchanges of sub-scale defined contribution accounts, according to a government-commissioned working group working to address the problem of small pots.

A report commissioned by pensions and financial inclusion minister Guy Opperman also urged the government's involvement in the development of protocols for identifying members and deciding when a transfer is in their interest.

Meanwhile, master trusts and other large providers should consolidate multiple pots held by the same person as a matter of course, and conduct trials of various without-consent consolidation approaches.

The proliferation of small pots threatens the success of auto-enrolment in general, and master trusts in particular, according to experts.

The Pensions Policy Institute has estimated that the number of small, deferred pots in master trusts could surge from 8m to 27m by 2035, costing around £1bn to administer.

The issue of member charges is also apparent. A large number of small pots contain little more than £1000, which is quickly whittled away by charges.

The PPI estimated that by 2035 the cost to members could be as high as £1.2bn.

Industry figures have long called on the government to intervene to remedy the situation.

'Pot-follows-member' systems were floated by the coalition government as early as 2013, and more recently leading master trusts have debated establishing their own clearing house-style exchange processes.

The report from Mr Opperman's working group identifies some changes already in place or being implemented, like pensions dashboards, that will have a bearing on the issue of small pots, but it cautions that these alone will be insufficient to reverse the trend.

To successfully automate consolidation, the working group said there needs to be an agreement on information standards that allow identification of an individual who would benefit from consolidation, within the constraints of data-sharing laws.

Work should also be carried out establishing proof of concept for member exchanges, while a cost-benefit analysis should be carried out of both traditional pot-follows-member and the automatic consolidation of small pots into a dedicated specialist scheme.

Finally, the working group recommended two specific models of small pot consolidation: the default small pot consolidation scheme, and the automatic “pot follows member” solution preferred by some industry players.

Mr Opperman said: "Given the risks that the growth of small pots presents to savers and their ability to plan for retirement, it is vital that we find a solution."

"Savers deserve to know that their hard-earned pension pots will be working for them through their career and ready for them when they retire," he added.

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