Small pots group revisits ‘pot follows member’ solution

Small pots group revisits ‘pot follows member’ solution

The small pots group has come up with three recommendations to consolidate the large number of small defined contribution pension pots in the UK, one of which includes the "pot follows members" solution which has been touted before.

In its spring 2022 report, the group - jointly convened by the Association of British Insurers and the Pensions and Lifetime Savings Association (PLSA) - recommended three potential solutions to tackle the issue of small deferred pension pots in the automatic enrolment workplace pension market.

The providers and schemes’ costs of administering these pots pose a “considerable challenge” to the UK’s pension system and presents potential risks to savers, the group said. 

They also risk undermining the purpose of pensions being a long-term retirement income, as people are more likely to take smaller pots as a cash lump sum. 

The ABI and PLSA said by the end of this year, there are likely to be more than 11mn small, deferred pots in total and without any change in the next 10 years, that figure will likely double again.

It has therefore recommended the "pot follows member" model which means that when an employee moves jobs, their deferred pension pot in their former employer's scheme automatically moves with them to the new employer’s scheme, with the opportunity to opt out.

This is despite minister for pensions and financial inclusion, Guy Opperman, dismissing the introduction of a "pot follows member" system back in 2018. 

At the time, in a written answer to a parliamentary question submitted by Conservative MP Royston Smith, Opperman said now is not "the right time to implement automatic transfers".

Standard Life workplace managing director Gail Izat, said: “The industry has been debating a number of possible solutions but our preference is for the introduction of a ‘pot follows member’ approach whereby pensions under a certain size automatically transfer when people change jobs. If implemented efficiently this will have the advantages of not requiring any action from the member. 

“It is also an easy concept for consumers to understand compared to other more complex approaches. In a charge cap environment concerns about the value for money offered by receiving schemes are greatly lessened.”

Meanwhile, ABI assistant director and head of long-term savings policy Rob Yuille, said the number of inactive small pots is rising rapidly, driven by automatic enrolment over the last decade. 

“If this is left unaddressed, pension savers could lose track of their money and may not get the most out of their retirement savings,” he said. “Pensions dashboards may increase the number of member-initiated transfers, but that is unlikely to go far enough to fix the problem.

“As an expert group we have identified viable models which should be taken forward. The evidence shows that compulsion will ultimately be needed for a whole of market solution that benefits all savers.”

Further recommendations 

In the report, the group also recommended a solution under the multiple default consolidators model where certain pots will automatically be transferred to a small pot consolidator, with savers being given an opportunity to opt out.