The preferred solutions are part of a call for evidence, launched on January 30, as a part of a series of reforms to defined contribution saving, as reported by Pensions Expert.
Since 2018, the value of lost pension pots in the UK has risen by 37 per cent, from £19.4bn to £26.6bn, according to research from the Pensions Policy Institute.
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.
The two models proposed are a further step from the last report of Small Pots Co-ordination Group - jointly convened by the Association of British Insurers and the Pensions and Lifetime Savings Association — which in June recommended three potential solutions to the issue.
Under the default consolidator model, deferred small pots which are eligible would transfer automatically to a consolidator, with members being given an opportunity to opt-out if they want to.
There are a variety of ways through which a member could be allocated to a consolidator scheme, such as this being the first scheme the individual is enrolled with when first joining an auto-enrolment scheme.
There could also be a list of approved consolidators for the member to choose from, or for those not taking the opportunity to make an active decision, they could be allocated to a consolidator from a carousel system.
Besides asking the industry what the key benefits and risks of this solution are, and who should be able to be a consolidator, the DWP is also keen to explore the option of a single default consolidator.
This option was discounted by the Small Pots Cross-Industry Co-ordination Group “on the grounds that it could have a potentially significant distortive effect on the pensions market and could be costly for government to run as a solution".
But the government believes this “approach requires further consideration, recognising the potential value of the simplicity it could offer”.
“Furthermore, it is unclear whether a private sector solution would effectively address the deferred small pot challenge, as such, a state-backed solution may be required to deal with non-economic pots,” the call for evidence stated.
Under the pot-follows-member model, when an employee moves jobs their deferred pension pot in their former scheme would automatically move with them to their new employer’s scheme, if it meets the chosen eligibility criteria for automatic consolidation.
Pot-follows-member was a system launched by former pensions minister Sir Steve Webb, which was due to come into effect in 2016.
However, in October 2015, Baroness Ros Altmann, his successor as pensions minister, halted the process of introducing the system to allow auto-enrolment to be completed.