A trial being developed by three master trusts to exchange small pots has grounded to a halt before it even started, due to the new normal minimum pension age rules, and will only be able to advance if new legislation is introduced.
The idea for the trial - first suggested by Now Pensions director of policy Adrian Boulding and being developed with Smart Pension and The People’s Pension - was to use the current legislation for bulk transfer without consent, which allows trustees to move members to another scheme without consulting them.
If trustees of both master trusts could agree that members would be better served by consolidating their savings within a larger pot, the transfer would be made, subject to an opt-out by the member.
The small pots issue
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 8mn to 27mn 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 £1,000, which is quickly whittled away by charges. The PPI estimated that by 2035 the cost to members could be as high as £1.2bn.
In an effort to stop charges and administration fees eroding the value of small pension pots, legislation came into force in April which bans the charging of flat fees on qualifying workplace pension pots worth less than £100.
The trial, which was also recommended by the small pots working group in its first report in 2020, was already a “complex project” to start with, “not least as it relies on trustee discretion to move members money without their consent,” says Smart Pension director of policy Darren Philp.
“So, quite rightly, trustees want to ensure any transfer is in members' best interests,” Philp said.
For the transfer to be deemed appropriate, trustees had to be confident that the member would not be put in a worse situation in the new scheme, and analysed different charging structures and scheme investments.
Philp added: "Good progress was made and it was a positive collaboration between the providers involved, but the recent changes to the normal minimum pension age, particularly the protection regime for those with an unqualified right to a protected pension age, was the straw that broke the camel's back.”
New NMPA rules jeopardise trial
HM Treasury announced in 2021 that it will raise the normal minimum pension age from 55 to 57 in April 2028, in order to maintain the 10-year gap between the age at which people can access their state and private pensions.
According to the rules, existing scheme members retain their right to access their pensions at 55, while those who become members of schemes after the date of the consultation will be subject to the updated rules.
The government had originally given people until April 2023 to either join or transfer into a scheme that could offer a protected pension age.