DWP opts for consolidator model for small pots issue - but flags 'pot for life' potential

But pensions minister Laura Trott said the longer-term solution to this issue would be to move to an Australian-style "pot for life" system.

In a consultation paper, published today (July 11), DWP first set out the feedback it received to the call for evidence on small pots which ran between January 30 and March 27, 2023.  

The DWP’s consultation looked at addressing the growth of deferred small pots in the automatic enrolment workplace pensions market.

In its response, the DWP said "pot follows member" risked situations where a saver would take a pension from a well-performing scheme into a poor-performing one when they moved jobs.

The DWP also concluded that due to the frequency of transfers likely required as part of a pot follows member approach this would require their scheme to become more liquid and reduce their capacity to invest in illiquid assets.

Instead the DWP opted for the multiple default consolidator approach.

It said: "We have concluded that the multiple default consolidator model is the optimum approach to addressing the deferred small pots challenge and has the potential to provide greater net benefits to members, ensuring that members eligible deferred pots are consolidated into one scheme.

"We recognise that this approach will not eliminate the future flow of deferred small pots. However, this approach will result in a significant reduction in the current stock of deferred small pots, whilst also enabling the consolidation of future deferred small pots created."

DWP said that to stop the creation of new deferred small pots, a more fundamental change to the automatic enrolment framework may be needed. 

In the future, a simpler system of ‘stapling’, as seen in Australia - where the members active pension pot is assigned as their pot for life, unless they actively choose an alternative provider - may emerge. 

Pensions minister Laura Trott said: "In the longer-term, a simpler system of workplace pension saving could emerge to deal with the fundamental issue that new pension pots are created each time someone starts a new job, for example, a lifetime provider model with each saver stapled to a ‘pot for life’, which may go further to solving this for existing and future pots.

"However, it is right we focus now on delivering this solution to the small pots issue we face as no matter what the future of workplace pension saving holds it is essential deferred small pots are consolidated to the benefit of schemes and most importantly members."

The previous call for evidence explored whether priority should be given to addressing the stock or flow of deferred small pots first.

There was no clear consensus about whether either should be prioritised. 

But respondents noted that neither a default consolidator nor pot follows member approach would truly eliminate the flow of deferred pots as the pots would have to sit deferred for a period of time before becoming eligible for consolidation. 

In this second part consultation, which will run for eight weeks until September 5, DWP outlined a number of proposals.

It set out the core framework for a multiple consolidator approach and sought views from respondents on whether they agreed with the proposals. 

It proposed that a central clearing house be created to act as a central point informing schemes where to transfer a members’ eligible deferred pot. 

The DWP also designed its proposed solution to enable a member to make an active choice in relation to which consolidator they would like their deferred pots to be transferred to.

But it asked respondents to consider how a consolidator would be allocated in cases where a member does not make an active decision which it anticipates being the majority of cases. 

Option A would be to allocate all small pots between the providers who meet the criteria to be a consolidator at a level proportionate to their market share. 

The intention here would be to mitigate concerns of further promotion of an oligopoly amongst the largest providers by all schemes growing, in terms of small pots transferred in, at their current rate.

Option B would be given the likelihood that a member will have a deferred pot already with a consolidator scheme, this scheme would be allocated as the members consolidator scheme. 

In cases where a member has pots with multiple schemes that are authorised consolidators their deferred pots pot could be allocated to the consolidator scheme that holds their largest deferred pot.

DWP said both of these options have their limitations; therefore, it would be interested to hear views from respondents on whether there would be a more appropriate method of allocating a consolidator to a member who does not make an active choice – including whether this role would be better placed sitting with a clearing house rather than the deferred member’s scheme.

It also proposed forming an industry group in late 2023 working with interested parties to explore the design and implementation of the default consolidator framework. 

It proposed thata pot would be eligible for automatic consolidation 12 months after the last contribution was made into the pot.

The call for evidence explored how far member exchange could work as a complementary solution alongside either pot follows member or a default consolidator. 

“In our view member exchange offers a valuable solution, ahead of the implementation of the multiple default consolidator framework, however, we do recognise that it cannot solve the whole market problem – given contractbased schemes cannot undertake bulk transfers without consent,” DWP said.

“We do, however, believe that this solution offers a ‘self-help’ solution for industry to start consolidating deferred small pots whilst also providing learning opportunities and evidence to support development and delivery of large-scale automated solutions.”

sonia.rach@ft.com

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