Small pots problem is ‘only going to get worse’

There have been warnings that the proliferation of small pots could damage the financial sustainability of master trusts, and the credibility of auto-enrolment as a whole. 

Moves were made to ban the charging of flat fees and move to a universal charging structure, despite some resistance from industry players.

A pilot member exchange trial that would have enabled trustees to move members between schemes was scuppered by changes to the normal minimum pension age, while the broader push towards pot consolidation has yet to see a preferred model emerge.

A growing issue

Speaking at the PLSA annual conference, Pensions Policy Institute deputy director Sarah Luheshi cited figures from a 2018 PPI study that suggested the number of small pots could rise to 27mn by 2035, compounded by the fact that people on average work 11 jobs in their lifetime, creating the potential for 10 more pots, which she said was “quite dangerous”.

The 2018 survey suggested there was more than £19bn in lost pots, “and that’s a scary number”, she said, with the average pot size being £12,000.

The PPI is shortly to publish an updated estimate of these numbers. Though not drawn on the specifics, Luheshi said: “It’s gone up, no surprises there,” adding that women and ethnic minorities tended to be disproportionately impacted. 

She said that the PPI is currently working on a data project with five master trusts, the aim of which is ultimately to be able to extract data from those five master trusts and use it to build profiles of different members, the type and size of pension pots they have, enabling analysis that could better clarify the nature and scale of the problem.

Speaking on the same panel, Capital Cranfield professional trustee Andy Cheseldine, who is also chair of the Small Pots Co-ordination Group, said that the small pots problem was really a series of problems with no single solution, and “they sort of form kind of a complex adaptive system”.

He advanced member exchange as a partial, short-term solution, but cautioned that costs would only spiral as the wait for a long-term legislative fix continues.

To illustrate the scale of the problem, Cheseldine estimated that there are now more than 4mn “micro-pots” of under £100, which poses two problems: members struggle to keep track of them, while providers suffer the cost burden, thanks to legislation.

“[The Pensions Regulator’s] general levy for this year is 72p per annum per member. That’s the minimum; the larger schemes pay more. In addition, you pay the Fraud Compensation Fund levy of 60p,” he explained.

“Taking 4mn micro-pots, the maximum charge providers can charge is 75bps, most of them charge a lot less. So the minimum loss on each of those pots is 57p per member, per year, 4mn times. That’s before they do anything— they don’t do any admin, before investing costs, admin costs, communication costs.”

I’m not blaming the providers. They’re not racketeering, they’re not actually even making a profit — it’s only going to get worse for the providers in the short termAndy Cheseldine, Small Pots Co-ordination Group

On small pots, he estimated there are 12mn pots worth less than £1,000, meaning there are 8mn problematic pots on top of the micro pots already identified.

“I asked a number of master trusts how much they think the realistic expected minimum output cost is — the lowest estimate I had from any of the master trusts was still over £10 per year per member, and some of them are considerably higher than that,” Cheseldine continued.

He suggested that losses amounted to around £80mn a year, increasing at around 15 per cent, or £12mn, a year, and he predicted that losses could amount to £670mn in the next four years, rising to more than £1bn by the end of the decade.

“I’m not blaming the providers. They’re not racketeering, they’re not actually even making a profit [...] it’s only going to get worse for the providers in the short term,” he said.

An automatic solution?

Rob O’Carroll, head of automatic enrolment policy at the Department for Work and Pensions, confirmed that Alex Burghart — who was confirmed on the same day as minister for pensions and growth at the DWP — had been briefed on the small pots issue.

The department remained focused on ensuring that people auto-enrolled by their employer into a DC scheme “are getting the best possible value from their savings, because that will provide the best retirement outcomes for them”, O’Carroll said.

He agreed that, absent action to solve the issue, deferred members in particular will face “opportunity costs”, impacting their quality of life in retirement, while providers and the industry at large are likewise shouldering mounting costs.

“There is cross-subsidy going on here, because those members with larger pots are effectively cross-subsidising those with small pots, so they are not getting the best value out of this either,” he said.

O’Carroll cited three main areas where the industry has made progress, the first of these being dashboards, which he said had the potential to help tackle the small pots problem, not least for the benefits it will provide for member engagement.

He also mentioned member exchange pilots, which “provide an opportunity to link up deferred pots with active pots and consolidate”.

Finally, he suggested that the DWP was keen to see the emergence of “some sort of automated transfer and product consolidation system”, targeted at those who are not engaged with pension saving and enabling them to consolidate regardless.

“It’s important to have member choice within that, but what’s really important is that it has a delivery system that underpins it,” O’Carroll said.

He added that the DWP continued seek industry and individual responses on preferred small pot solutions, but cautioned that from a legislative perspective, the absence of a one-size-fits-all solution meant that “cost benefit analysis is really important as well as policy design”, and that this will necessarily take some time to get right.

Benjamin Mercer is a senior reporter at Pensions Expert, FTAdviser's sister publication