Small pots report recommends member exchange trials

A report commissioned by pensions and financial inclusion minister Guy Opperman also urged the government’s involvement in the development of protocols for identifying members and deciding when a transfer is in their interest.

Meanwhile, master trusts and other large providers should consolidate multiple pots held by the same person as a matter of course, and conduct trials of various without-consent consolidation approaches.

The proliferation of small pots threatens the success of auto-enrolment in general, and master trusts in particular, according to experts.

There needs to be a reliable member identification system to allow pots to be accurately allocated to members

Tim Middleton, Pensions Management Institute

The Pensions Policy Institute has estimated that the number of small, deferred pots in master trusts could surge from 8m to 27m by 2035, costing around £1bn to administer.

The issue of member charges is also apparent. A large number of small pots contain little more than £1,000, which is quickly whittled away by charges. The PPI estimated that by 2035 the cost to members could be as high as £1.2bn.

Industry figures have long called on the government to intervene to remedy the situation. ‘Pot-follows-member’ systems were floated by the coalition government as early as 2013, and more recently leading master trusts have debated establishing their own clearing house-style exchange processes.

The report from Mr Opperman’s working group identifies some changes already in place or being implemented, like pensions dashboards, that will have a bearing on the issue of small pots, and it cautions that these alone will be insufficient to reverse the trend.

To successfully automate consolidation, the working group said providers and the government will need to agree on information standards that allow identification of an individual who would benefit from consolidation to benefit from a transfer, within the constraints of data-sharing laws.

Work should also be carried out establishing proof of concept for member exchanges, while a cost-benefit analysis should be carried out on both traditional pot-follows-member and the automatic consolidation of small pots into a dedicated specialist scheme.

Finally, the working group recommended two specific models of small pot consolidation: the default small pot consolidation scheme, and the automatic pot-follows-member solution preferred by some industry players.

Mr Opperman said: “Given the risks that the growth of small pots present to savers and their ability to plan for retirement, it is vital that we find a solution.

“Savers deserve to know that their hard-earned pension pots will be working for them throughout their career and ready for them when they retire.”

Proposals warmly received

The report was broadly welcomed by the industry as an important step towards solving the small pots conundrum.

Mike Ambery, head of DC proposition and strategic provider relations at Hymans Robertson, expressed the hope that implementing the group’s proposals will “prevent the loss and erosion of small pension pots”.

“We see this as a critical responsibility to ensure ownership and the improvement of member outcomes. These will be massively improved if pension pots can continue to accrue throughout the flexible working life of the modern day workforce,” he said.

“The challenge now will be for providers to ensure that the administration and technical complexities are overcome so that they are able to deliver and improve those member outcomes. We’ve waited for this for a few years and are glad to see it now heading in the right direction.”

Automation is essential

However, the jubilation was tempered by the knowledge that a considerable amount of work lies ahead if the working group’s proposals are to be realised.

Tim Middleton, head of technical at the Pensions Management Institute, said that though encouraging progress has been made, “a number of significant problems [still need] to be addressed and overcome”.

“There needs to be a reliable member identification system to allow pots to be accurately allocated to members,” he said.

There also has to be a universally recognised rationale for the selection of appropriate consolidation vehicles. Crucially, if public confidence is to be achieved, there must be robust safeguards against fraud.”

While preferring that members take action themselves to consolidate their pension pots, something he said the introduction of dashboards will help facilitate, Mr Middleton added that “an automated system will have a vital role in consolidating the benefits of those who are unable or unwilling to do this for themselves”.

Paul Tinslay, professional trustee at Dalriada, stressed this last point as being critical to surmounting the challenge posed by “generation default”, those members who are “perennially unengaged” and so unlikely to take action themselves.

“The [existence of the] perennially unengaged cohort means that scheme-led default consolidation solutions are needed, and we [should] not rely on member-initiated consolidation alone,” he explained. 

“We will need automated large-scale, low-cost transfers and consolidation, with customer journey mapping, cyber and scam protection.”