Small pots mass consolidation poised for 2025-26

In its first progress report since its formation in March, published on Thursday, the group outlined a roadmap for the implementation of a mass-scale consolidation model, set to commence after a lengthy and complex process involving large swaths of the pensions industry.

Jointly convened by the Pensions and Lifetime Savings Association and the Association of British Insurers, the Small Pots Co-ordination Group has examined the feasibility of a member exchange exercise, the best approach to tackle the admin challenges for low-cost transfers, and is seeking to find a solution to the growing number of small deferred pots in the defined contribution pension system.

The report said there are currently 3m deferred savers invested in default options with pot sizes of under £100, and 10.5m savers in total with pot sizes under £1,000. 

This report enables us to further understand the positive progress that is being made by the small pots industry group to tackle the administrative challenges of deferred small pension pots

Guy Opperman, DWP

The current focus of the working group has been finding solutions for pots of less than £500. 

Recommendations to ready the industry

The group’s roadmap has outlined the steps the wider industry and regulators need to make to fulfil the proposed implementation of the consolidation model.

This includes a regulatory change permitting transfers without member consent, in both trust and contract-based environments, where providers can show it is in member interests.

Stephen Budge, principal in LCP’s DC team, said that regulatory change “may make sense to those who run pension schemes" so that they have the "necessary scale and efficiency to make small pot consolidation work,” but added that careful consideration will be needed to “convince scheme members this is in their interest”.

In January, the Department for Work and Pensions announced it was to ban the charging of flat fees on pension pots under £100 in an attempt to stop their erosion by charges and administration costs — a move also backed by the report.

During 2021-22, same-scheme consolidation, as outlined by the government in 2020, will continue alongside the implementation of a low-cost transfer process. During the same period, the pensions dashboard’s data-matching proposals will be developed while further work to develop consolidation models will continue.

Towards the end of this phase, the member exchange proof of concept and pilot will commence alongside a cross-holdings simulation exercise. The pilot is currently being undertaken by a sub-group of master trusts, having been recommended by a report commissioned by pensions minister Guy Opperman in late 2020.

In 2023-24, the same-scheme consolidation model will near its end, while the dashboard’s pensions finder service will become operational. Data from this service will then be used to overcome several further administrative issues.

Around this time, the member exchange pilot will end, and broader consumer testing will begin.

At the very end of 2023-24, legislation will begin to be introduced.

In 2025-26, the value-for-money metrics will be finalised before the implementation of the mass-scale consolidation model begins.

The group found that eventual solutions must address the existing stock of small pots but also stem the flow of new small pots. They must also work for both trust and contract-based pensions, navigating the legal and regulatory differences between the two structures.

Additionally, further evidence will be required to support decisions around how the consolidation model will operate.

In a statement, the group said that “an ambition to ensure whatever solutions are proposed work in conjunction with other ongoing interventions in the industry, and that they are as simple and low cost as possible to derive the maximum future benefit for pension savers,” will add to the overall complexity of the project.

The input of expert working groups – on customer value, low-cost transfers and data standards – are all included in the report.

Guy Opperman, minister for pensions and financial inclusion, said: “This report enables us to further understand the positive progress that is being made by the small pots industry group to tackle the administrative challenges of deferred small pension pots.

“I encourage the industry to continue in their efforts to understand how far they can progress consolidation solutions within the existing legislative framework.”

Andy Cheseldine, chair of the Small Pots Co-ordination Group, said he was “impressed with the progress the group has made so far in getting to grips with the complexity of this project and forging a way forward”.

He added that the group believes it has enough evidence to get started on solutions.

“Further research will let us hone our recommendations and provide the complete evidence necessary to justify any new regulatory or legislative changes,” he said.

Complexities may hamper progress

The Investing and Saving Alliance endorsed the report, but acknowledged that there are “several challenges to overcome”.

Carol Knight, chief operating officer at Tisa, said: “This report is crucial to resolve the growing industry problem of small pots.

“Tisa has long supported efforts to resolve the problem of small pension pots. We believe that, with full collaboration between the government and the industry, a robust and effective framework can be created to facilitate the consolidation and transfer of small pots.

“This report is a great start, and we look forward to working closely with both industry members and the government to take the findings forward and develop regulatory and legislative solutions,” she added.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown reiterated the “enormous task facing the industry”.

She noted that ideally, levels of engagement between providers and members would see members “sufficiently engaged with their pensions and deal with the transfers themselves,” but recognised that there is a “need for some kind of automatic solution to reduce the number of small pots in existence and it is important the industry is bracing itself to deal with this”.

“However, there are also bigger issues at play here, and while automatic transfers will deal with the number of small pension pots in existence, thought also needs to be given to how to solve the issue of small pots being created to begin with.”

“That’s why we support the idea of adapting auto-enrolment to allow individuals to choose which provider their pension contributions get paid to,” she added.