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.
But in November it U-turned and closed this window without prior notice. The last accepted applications for transfer had to be made before midnight on November 3.
However, some members might be able to transfer their pot and still access their pension at age 55, depending on the receiving scheme rules, which is the crux of the problem for the small pots trial exchange, explained CMS senior associate Hadassah Shulman.
“In order to retain the right to retire at age 55 after April 2028, a member must have had an ‘unqualified’ right to retire at age 55 that was written into the rules of the relevant pension scheme as at February 11 2021 – known as a protected pension age.”
But with the new rules introduced in November, “if you were not already in a scheme which had such a right in its rules, even if you transfer into a scheme which has a right in its rules, that right will not apply to you,” she added.
This does not mean that transfers between a scheme with a protected pension age have been banned, it just means that the member cannot gain a protected pension age of 55 now, she continued.
Members with a right to retire at age 55 after April 2028 can “still transfer and retain that right provided certain conditions are met,” Shulman explained.
“It may however mean that you can only take your transferred in benefits at age 55 and not any further benefits accrued in the receiving scheme.”
Shulman argued that since the trial would imply transfers without member consent it is probable there will be member complaints.
“Whilst they may not be many people who are in a position to retire before age 57, anyone who does want to and loses this right as a result of an action they did not consent to, it likely to complain to the [Pensions] Ombudsman.”
Hopes for new legislation
Philp noted that these changes “have caused widespread concern among the pensions industry and have had significant knock-on consequences for the member exchange pilot, meaning that some schemes that should never have had a protected pension age have now got one due to a quirk of drafting of the trust deed and rules”.
B&CE director of policy Phil Brown, also involved in the trial through The People’s Pension, said: “Good ideas sometimes fail for reasons beyond your control and that’s exactly what happened with member exchange.”
Since the trial relied on trustees initiating bulk transfers without consent, “we needed there to be no significant member detriment as a result of the transfer,” he noted.
“This was potentially viable up until November last year when the new protection regime for pots in schemes with a pension age of 55 written into their scheme rules was announced.
“Transferring pots with a protected pension age to schemes that cannot administer that protected right breached the threshold for unacceptable member detriment.”
Philp and Brown are now calling on government to step in to make the trial viable.
“This is frustrating but not every good idea succeeds. We now need to re-open the conversation with government about a statutory solution to the small pots problem,” Brown noted.
Philp added: “It is clear to us that ultimately legislation will be needed to solve the small pots issue. We need to settle on a model that delivers the right outcome for savers and then crack on with delivering against that."
Maria Espadinha is the editor of Pensions Expert
