Widespread small pot consolidation is set to be implemented in 2025-26, but industry experts have voiced concerns over the enormity of the task.
In its first progress report since its formation in March, the Small Pots Cross-Industry Co-ordination Group outlined a roadmap for the implementation of a mass-scale consolidation model.
Jointly convened by the Pensions and Lifetime Savings Association and the Association of British Insurers, the Small Pots Co-ordination Group has examined the feasibility of a member exchange exercise and the best approach to tackle the administration challenges for low-cost transfers.
It is also seeking to find a solution to the growing number of small deferred pots in the defined contribution pension system.
The report says there are currently 3m deferred savers invested in default options with pot sizes of under £100 and 10.5m savers in total with pot sizes under £1,000.
The current focus of the working group has been finding solutions for pots of less than £500.
Recommendations to ready the industry
The group’s roadmap has outlined the steps the industry and regulators need to make to achieve widespread consolidation.
This includes a regulatory change permitting transfers without member consent, in both trust and contract-based environments, where providers can show it is in member interests.
Stephen Budge, principal in LCP’s defined contribution team, said this change “may make sense to those who run pension schemes" so that they achieve the necessary scale and efficiency, but he warned effort would be needed to “convince scheme members this is in their interest.”
During 2021-22 same scheme consolidation, as outlined by the Government in 2020, will continue alongside the implementation of a low-cost transfer process. During the same period, the pensions dashboard’s data matching proposals will be developed while further work to develop consolidation models will continue.
Towards the end of this phase, the member exchange proof of concept and pilot will begin alongside a cross-holdings simulation exercise. The pilot is currently being undertaken by a sub-group of master trusts, having been recommended by a report commissioned by pensions minister Guy Opperman in late 2020.
In 2023-24, the same scheme consolidation model will near its end, while the dashboard’s pensions finder service will become operational. Data from this service will then be used to overcome several further administrative issues.
Around this time, the member exchange pilot will end, and broader consumer testing will begin.
At the very end of 2023-24, legislation will begin to be introduced.
In 2025-26, the value for money metrics will be finalised before the implementation of the mass-scale consolidation model begins.
The group has found that eventual solutions must address the existing stock of small pots but also stem the flow of new small pots. They must also work for both trust and contract-based pensions, navigating the legal and regulatory differences between the two structures.
Opperman said: “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.”
Complexities may hamper progress
Carol Knight, chief operating officer at Tisa, said the report was "crucial" to address the growing problem of small pots.
She said: “Tisa has long supported efforts to resolve the problem of small pension pots. 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."
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, reiterated the “enormous task facing the industry”.
She noted that ideally, levels of engagement between providers and members would see members “sufficiently engaged with their pensions and deal with the transfers themselves,” but recognised that there is a “need for some kind of automatic solution to reduce the number of small pots in existence and it is important the industry is bracing itself to deal with this”.
“However, there are also bigger issues at play here, and while automatic transfers will deal with the number of small pension pots in existence thought also needs to be given to how to solve the issue of small pots being created to begin with.”
“That’s why we support the idea of adapting auto-enrolment to allow individuals to choose which provider their pension contributions get paid to,” she added.
