- The government has backed creating new default ‘consolidator’ schemes to sweep up small ‘deferred’ pension pots (Ending the proliferation of deferred small pension pots-consultation (publishing.service.gov.uk))
- Proposals would mean pensions worth less than £1,000 that members are no longer contributing to are transferred automatically to a consolidator (or consolidators)
- Savers will be given the option to opt-out of auto-consolidation if they prefer to stay with their existing provider
- A clearing house will need to be built to facilitate the proposals – although it remains unclear what this will cost or who will pay for it
- Pensions minister Laura Trott says a ‘lifetime provider’ model could help reduce the proliferation of small pots in the future, but current focus is on addressing existing small pots
- Automatic transfers come with risks, including creating a potential opportunity for scammers to exploit and moving members to a scheme with higher charges or worse investment performance
Tom Selby, head of retirement policy at AJ Bell, comments:
“Automatic enrolment has been hugely successful in boosting the number of people saving at least something for retirement. However, the reforms have also exacerbated the small pots problem, with the number of pensions becoming disconnected from their owners ballooning by over £7 billion, from £19.4 billion to £26.6 billion*, between 2018 and 2022.
“This surge in lost pots is piling the pressure on the government to find a solution and today the DWP has set out its initial plans to tackle the problem.
“The focus will be on developing an automatic transfer system for an estimated 14 million ‘deferred’ pots worth less than £1,000. The DWP reckons the total assets of these small pots are worth around £4 billion – money it hopes to corral into larger schemes which might then invest more of members’ retirement savings in the UK’s post-pandemic recovery.
“Part of the reason the government is focusing on small pots is that automatically transferring someone’s pension without getting their permission first comes with real risks. It is possible, for example, that someone might have their retirement pot moved to a scheme with higher charges or worse investment performance, or both. While it is logical to look at ways to increase scale and efficiency in the pension system, protecting the consumer must be the number one priority
“By restricting automatic transfers to sub-£1,000 deferred pensions, the DWP is hoping to mitigate this risk, as the impact of charge differentials in pounds and pence terms should be relatively small.
“There is also the danger scammers might attempt to exploit the reforms, although pension schemes now have the power to block or delay transfers to suspicious-looking schemes.”
Tackling the engagement gap and pensions dashboards
“The plans announced today will not prevent the future proliferation of small pots or do anything for people with deferred pension pots worth £1,000 or more.
“Pensions minister Laura Trott says she is interested in the idea of allowing savers to choose where their auto-enrolment contributions are paid. However, this could add further costs to the system, particularly for employers, and is not part of the plans announced today.
“Ultimately, the government, regulators and industry need to focus now on enabling savers to more easily engage with their retirement savings and consolidate their pensions themselves. Pensions dashboards have the potential to make this significantly easier, but their introduction has been shunted beyond the general election.
“We now need more clarity from government on how and when dashboards will be introduced, so savers can see all their retirement pots in one place and consider combining them with a single, low-cost provider.”
