Pension providers have called for the pension dashboard to come into force before a solution for deferred small pots is confirmed.
In response to the Department for Work and Pensions' consultation, ‘Ending the proliferation of deferred small pots’, which closes today (September 5), Jamie Jenkins, director of policy and communications at Royal London, said the industry is in a different place to where it was 10 years ago.
“We are now probably a couple of years - maybe three years - from the launch of the pensions dashboard,” he said.
“Clearly that's been deferred quite considerably in recent months in terms of that it is now going to happen in 2026.
“A lot of work has been done and a lot of the infrastructure for that is around connecting data, policy information, member data between different pension providers. So a lot of this plumbing and architecture has been designed but still has to be implemented and that feels like a really important project.”
He explained that so far, what has been done on small pots is building something which is probably a similar size or even bigger than the project for the dashboard.
The proposal is that there will be a central clearing house or a central register that will act as an independent body on behalf of the industry to exchange data and ultimately to transfer money between providers, in order to facilitate large consolidators to take small pension pots.
“For me though, if I go back to the dashboard for a second, it feels like there is a sort of sequencing here because rather than embark on another 2, 3, 4 year project that involves major kind of IT build, should we not use the architecture that we've started to work on for the pensions dashboard,” Jenkins said.
“This is alluded to in the consultation, but it feels like it's slightly underplayed, and I feel like it should be a bigger theme.
“We should complete and digitise pensions through the dashboard, create the infrastructure and then whatever the solution, whether that is indeed large consolidators, default consolidators or pot follows members, could be based upon that kind of architecture.”
Jenkins explained that we are currently in an environment where we've been quick to rule out member engagement in the consolidation of small pots.
“I'm pretty tech savvy, and I'm immersed in the industry and I'm pretty on top of what I've got pension wise, but of course, that would be because of work. I work in this industry,” he said.
“A lot of people my age or older than me who are not engaged with this industry at all, haven't necessarily adopted signing up to their app and managing all the finances online.
“But younger people and those who are starting work for the first time only know online technology and only would expect to be able to do things through apps and through interconnected digital services and they don't know anything different.”
Member engagement
Likewise, Kate Smith, head of pensions at Aegon, said: “Nearly every job comes with a pension but the UK’s fluid job market and general lack of engagement with pensions means the challenge of small, deferred pension pots is growing fast.
“The government’s preferred solution to address this challenge is to encourage a small number of existing large schemes, specifically master trusts, to apply to become authorised default consolidators, for small pots valued sub £1,000.
“This includes the use of a clearing house or central registry to match small pots to their chosen consolidator or to allocate one, if the member hasn’t selected one.”
She added: “We believe this model is fraught with complexity and cost and believe more consideration should be given to other solutions including ‘pot follows member’. “
Jenkins argued that as an industry, many are underestimating the importance of the dashboard.
For a young person, pensions are one of the few areas growing as an asset and when you add employer contributions and tax relief, “it's a very kind of exponential growth compared to what you are paying for it”, he said.
“I can see a world where younger people with the dashboard actually operational in two or three years time would be quite interested in what they've got in their pension pots.”
However he argued that the cynics will say the dashboard will never do that.
They will state that the dashboard is only about funding and valuing what you've got rather than actually being able to do anything functional.
“It's inconceivable that the dashboard won't develop further functionality,” he said.
“It's only going to build from there and we're not even saying that people necessarily need to be able to execute the transfer, but they can instruct it. If I drag and drop two previous pensions and that's an instruction to those providers to transfer them suddenly that's really simple.”
Jenkins added: “I'm not saying it's the totality of the solution, and will deal with all small pots, but it feels like we're sort of giving up on the idea, almost a little bit too soon."
Transfers
Smith explained that a major barrier to any automated small pots solution is the total scheme cost of making pension transfers, which varies by scheme between £30 and £80, as indicated in the consultation paper.
“Until these costs are eliminated, and truly automated, with no human intervention, and communications fully digitalised, it’s hard to see any small pot solution being achievable or cost-effective,” she said.
“We urge the government and regulators to work with the pension industry to investigate ways to reduce transfer costs before forging ahead with any small pots solution.”
She explained that small pots consolidators will have to demonstrate the highest value for the member under the proposed value for member framework.
The framework, once in place, will naturally drive consolidation into larger schemes providing better value for money.
“Surely it makes sense for scheme consolidation to happen before attempting consolidation of small pots at individual level,” she said.
“The concept of attempting individual and scheme consolidation at the same time is highly problematic. It makes no sense for a scheme to be a small pot consolidator if it is then, or becomes, at risk of being wound-up or consolidated if it offers poor value.”
She added: “Rather than focusing on building a small pots solution at the same time as other government pension initiatives, we believe the government should priortise the value for money framework and getting dashboards up and running. Both may go some way in helping to solve the small pots problem.”
In addition, Pete Glancy, head of pension policy at Scottish Widows, said efficiency needs to be at the core of any solution since high volumes of transfers will be needed to address the stock of small pots.
“Regardless of the model chosen, transfer costs will need to be much lower than is the case for typical transfers now or this will become a barrier instead of addressing the issue,” he said.
“Further examination is needed over the proposed process to ensure it is efficient, cost-effective, clear and simple for savers.
“Now the government has chosen a preferred model, we should give the industry group the flexibility to design a system that will work as efficiently as possible to encourage take up and ensure it is a success.”
On the fence
Elsewhere, Jon Greer, head of retirement policy at Quilter, said the firm does not have a strong view either way when it comes to the option of a clearing house or central registry.
He explained that the clearing house approach looks more involved and perhaps more costly to run.
“But rather than create a lot of complexity over the consolidator for pots of less than £1,000 is it time that we consider Nest as a port of call for small pots of less that £1,000, in the absence of a specific member choice,” he said.
“Whatever the solution, we don't think it’s probably the time to mandate consolidation of existing small pots. There are already mechanisms to ensure members receive value for money from their existing scheme.
“We would urge the DWP to not create complexity in the system. It isn't clear that the consolidation of small pots to a central provider will destabilise the workplace market – if anything it could make the majority of the workplace pensions market more profitable if administration of such small pots is taken out of the ‘main system’.”
The DWP declined to comment.
sonia.rach@ft.com
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