On the go: The government has been urged to look again at a ‘pot-follows-member’ solution to the small pots problem plaguing auto-enrolment and master trusts.
Labour MP Stephen Timms, chair of the Work and Pensions Committee, wrote an open letter in July calling for “workable solutions for consolidating very small pension pots”.
Pensions Expert has reported several times on the problems posed to auto-enrolment, master trusts and the defined contribution space more broadly, with the cost of administering small pots expected to rise to £1bn by 2035 unless action is taken.
In response, LCP’s head of DC consulting, Laura Myers, argued that a ‘pot-follows-member’ approach, under which small pots are automatically moved to the new provider unless the member opts out, would be an acceptable “incremental” solution.
Moreover, it would not face significant hurdles presented by other solutions — for instance, the idea that members should have one pension pot for life, which “would involve major upheaval in the current system and could lead to providers cherry-picking those with larger pension pots and offering worse terms to lower earners”, Ms Myers said.
Such approaches also rely on active engagement by members and a relatively high degree of financial literacy in order that mistakes be avoided, and she noted “there would also be a considerable ‘deadweight’ cost as providers competed to win the most lucrative business”.
By contrast, the Department for Work and Pensions has already prepared primary legislation for the pot-follows-member approach and evaluated its pros and cons, and Ms Myers added that it would be “an approach which the public will understand and could help to deal with this growing problem”.
