Government consults on plan to consolidate 13m small pension pots

It is seeking to establish a “federated” system of consolidator schemes that can combine deferred defined contribution (DC) pots worth less than £1,000, where the saver has not done so themselves. This will be overseen by a central body.

The DWP estimates there are more than 13 million deferred pots of this kind, holding at least £4bn in assets. These small pots are inefficient for providers and can be eroded by fees, representing poor value for members, the department said.

Pensions minister Torsten Bell said in his foreword to the consultation described the small pots problem as “a structural inefficiency” that costs the industry £240m to administer.

“That runs counter to what we want from this market: a system that delivers value for money, the benefits of scale provision and secure retirement incomes for the vast majority of savers,” Bell said. “That is a system that builds trust and confidence, removing current complexity and waste of fragmented small pots.”

“These are big decisions, and they must be taken with one principle at their heart: what is best for members. Our ambition is clear: to have small pot consolidation operational from 2030.”

Torsten Bell, minister for pensions

The government has already legislated for a “multiple default consolidator” model to address the small pots issue, through the Pension Schemes Act 2026.

Bell said the consultation would establish “the building blocks of the policy”, including authorisation and digital infrastructure.

“These are big decisions, and they must be taken with one principle at their heart: what is best for members,” the minister said. “Our ambition is clear: to have small pot consolidation operational from 2030.

“This is a reform built for the long term, and we want to hear your views on how to make this work in practice – your insights will be vital in shaping a system that delivers for members and the industry.”

Building a ‘federated’ system

Last year, trade body Pensions UK published its recommendations  for how the small pots consolidation regime could work in practice. The report, co-authored by technology firm Lumera and Kim Gubler Consulting, recommended a “federated” approach – essentially using existing technologies to facilitate consolidation, overseen by a legislative framework and industry-approved standards.

Maurice Titley, commercial director for data and dashboards at Lumera and co-author of the Pensions UK report, said: “The scale of the small pots challenge makes consolidation one of the most significant operational exercises facing the pensions industry…

“By allowing schemes to continue exchanging data, carrying out matching activity and undertaking transfers through scheme-led processes, within a common framework of rules, standards and governance, it should provide an efficient and scalable model, balancing operational practicality with strong governance, and alignment with the DWP’s roadmap.”

Titley added that the DWP’s consultation also provided an opportunity “to test and refine the standards, governance and operational processes that will ultimately be needed to make consolidation work effectively for millions of savers”.

Other commentators emphasised that the consultation needed to address important elements of the framework, including how consolidators will be authorised and how data matching standards will be set and monitored.

David Pye, head of client development at Broadstone, said: “Consolidation should not simply be about moving assets into bigger schemes, but ensuring savers are transferred into well-governed arrangements that offer good value for money and lay the groundwork for achieving improved retirement outcomes.

“This consultation makes clear that there are important practical questions still to resolve, particularly around authorisations, data matching, member communications and the treatment of pots carrying valuable guarantees or protections. The industry will also need sufficient certainty and time to build the infrastructure required to make millions of transfers accurately and securely.”

“We need an approach that is operationally workable, avoids unnecessary complexity and gives schemes sufficient time to prepare. The ambition is right, but successful reform will ultimately depend on getting the practical detail right.”

Helen Forrest Hall, PMI

Helen Forrest Hall, chief strategy officer at the Pensions Management Institute, highlighted that enabling millions of small pots to be moved around the pension system would “place significant demands on administrators, systems and data”, meaning that “the final framework must be designed around what can realistically be implemented at scale”.

She added: “We need an approach that is operationally workable, avoids unnecessary complexity and gives schemes sufficient time to prepare. The ambition is right, but successful reform will ultimately depend on getting the practical detail right.”

Pete Glancy, head of pensions policy at Scottish Widows, indicated that the small pots work needed to be combined with other measures to improve adequacy.

“These pots are all too easy for workers to forget and ultimately leave unclaimed,” Glancy said. “This consultation rightly looks to tackle that problem by helping consolidate pensions without savers having to navigate the process.

“Alongside the pensions dashboard, we’re calling on the government to set out a roadmap to 12% minimum contributions. We’re also encouraging the government to introduce an auto-enrolment equivalent for self-employed workers. Together, these reforms can make pensions easier to understand and help people save more for retirement with greater confidence in their financial future.”