Small pots group revisits pot-follows-member solution

In its spring 2022 report, the group — jointly convened by the Association of British Insurers and the Pensions and Lifetime Savings Association — recommended three potential solutions to tackle the issue of small deferred pension pots in the auto-enrolment workplace pension market.

The providers and schemes’ costs of administering these pots poses a “considerable challenge” to the UK’s pension system and presents potential risks to savers, the group said. They also risk undermining the purpose of pensions being a long-term retirement income, as people are more likely to take smaller pots as a cash lump sum. 

Pensions dashboards may increase the number of member-initiated transfers, but that is unlikely to go far enough to fix the problem

Rob Yuille, ABI

The ABI and PLSA said that by the end of this year there are likely to be more than 11mn small deferred pots in total, and without any change in the next 10 years that figure will likely double again.

It has therefore recommended the pot-follows-member model, which means that when employees move jobs, their deferred pension pot in their former employer's scheme automatically moves with them to the new employer’s scheme, with the opportunity to opt out.

This is despite Guy Opperman, minister for pensions and financial inclusion, dismissing the introduction of a pot-follows-member system back in 2018.

At the time, in a written answer to a parliamentary question submitted by Conservative MP Royston Smith, Opperman said it was not "the right time to implement automatic transfers".

Gail Izat, Standard Life workplace managing director, said: “The industry has been debating a number of possible solutions, but our preference is for the introduction of a pot-follows-member approach, whereby pensions under a certain size automatically transfer when people change jobs. If implemented efficiently this will have the advantages of not requiring any action from the member. 

“It is also an easy concept for consumers to understand compared to other more complex approaches. In a charge-cap environment, concerns about the value for money offered by receiving schemes are greatly lessened.”

Meanwhile, Rob Yuille, ABI assistant director and head of long-term savings policy, said the number of inactive small pots is rising rapidly, driven by auto-enrolment over the past decade. 

“If this is left unaddressed, pension savers could lose track of their money and may not get the most out of their retirement savings,” he said. “Pensions dashboards may increase the number of member-initiated transfers, but that is unlikely to go far enough to fix the problem.

“As an expert group we have identified viable models which should be taken forward. The evidence shows that compulsion will ultimately be needed for a whole-of-market solution that benefits all savers.”

Further recommendations 

In the report, the group also recommended a solution under the multiple-default-consolidators model, where certain pots will automatically be transferred to a small pot consolidator, with savers being given an opportunity to opt out. 

If a person has multiple deferred small pots, these could be linked by the consolidator and this model comes with a variety of design choices. A single default consolidator model has been discounted.

The member-exchange model, the trial for which initially ground to a halt, was another recommendation.

For this model, the principles were tested with three master trusts, and can identify a small deferred pot in one master trust and an active pot in another master trust and merge the two into the active pot.

Izat added: "Alternatives such as a ‘single member view’, where members can see all their pots with each provider, risk duplicating the work of the pensions dashboard project.

“The other option under discussion has been a default small pot consolidation option, in which any small deferred pots would be transferred to a pre-determined consolidation destination. However, this runs the risk of distorting competition and gives consolidators little incentive to invest in their proposition.”

The group suggested that a combination of these three models may be the best approach. However, further legislation will be needed for the proposed models to work, they said.

The member exchange pilot found that creating a framework for transfers without savers’ consent, something which is crucial to reducing the number of small pots, was not possible at this stage.

PLSA deputy director of policy Joe Dabrowski, said: “Supported by the expertise of pension providers, regulatory and consumer bodies, the co-ordination group has made significant progress in setting out a pathway to solve the small pots issue once and for all.

“Left unchecked, the number of small pots is set to more than double to 27mn by 2030, with implications for the engagement and understanding, as well as the retirement outcomes, of affected savers.”

The group also recommended legislation be brought forward that compels relevant providers to take part in the solution, defines the pots in scope and defines the liability model. 

Dabrowski added: “All the evidence indicates that a successful, long-term solution will need a legislative footing. Given the expanding number of pots it will be important to take forward a solution quickly, and we look forward to working with government to make this happen.”

The ABI and PLSA called for further analysis on the three models by industry and government to understand which offer the best outcome for savers, including which models consumers prefer, and their cost and effectiveness in reducing the number of small pots. 

Opperman said: "Given the risks that the growth of deferred small pots presents to savers and their ability to plan for retirement, it is vital that we find the right solution.

“I thank the small pots co-ordination group for their recommendations and look forward to continuing the close collaboration between regulators, pension providers, industry bodies and stakeholders as we collectively work to ensure the record number of Brits now saving for a pension can achieve the best retirement possible.”

This article first appeared on FTAdviser.com