Centralisation and data standards highlighted as key barriers in small pots issue

The Pensions Policy Institute (PPI) has published the findings of its international study on how other countries have dealt with increasing numbers of small, deferred member pension pots, emphasising the importance of centralisation.

The study, which was commissioned by the Master Trust Expert Panel convened by Department for Work and Pensions (DWP) earlier this year, identified three key aspects that could act as both barriers and enablers to instituting all policy models.

In particular, it found that, systems of transfer and consolidation are easier for employers to comply with when there is a large central platform, or several connected platforms, as is the case in Australia, Mexico, Sweden and the USA.

The report argued that such a central platform can reduce the administrative burden on employers, whilst also reducing the potential impact of employer error.

However, it emphasised that this can require "significant" set-up time and costs, although it clarified that sharing the costs between pension providers and government could in turn reduce the costs borne by members.

The report also highlighted the importance of unified data standards, arguing that this would further support the creation of a central system, as it would allow for easier collection of data on individuals and pension schemes.

It argued that this could also could help to ensure a speedier and less costly transfer system, as well as making regulatory enforcement and assessment of tax compliance easier.

However, the study found that centralised transfer and consolidation systems are less effective without unique identification numbers, noting that all of the countries studied utilised these.

Commenting on the findings, PPI head of policy research, Daniela Silcock, stated: “Many countries, (for example, Australia, Chile, Ireland, Mexico, New Zealand, Sweden and the USA) who have policies designed to minimise the financial downsides associated with small, deferred member pension pots have centralised aspects (through data standards, data platforms and clearing houses) of their pension transfer and management systems.

“Centralisation plays a crucial role in minimising harm from small pots because policies generally either involve pots needing to move from scheme to scheme (for example, pot follows member) or for employers to pay contributions to many different schemes on behalf of members (for example, lifetime provider).

“Once multiple pots or payments are being sent between schemes, a level of centralisation becomes necessary in order to avoid lengthy transfer times, significant resources being expended on identification and general administrative errors.

“While these systems are helpful, they are also expensive and take a long time to develop.

"However, the UK is on its way towards developing some aspects already via the pensions dashboard which will at least lay the groundwork for a national pensions data standard and could help with development of data platforms.

“The UK is particularly lucky in that so many other countries are already tackling the problem of small, deferred member pension pots, and can therefore provide valuable lessons regarding the potential benefits and pitfalls of pursuing different approaches.”

The PPI's report has also identified a number of policy model specific findings, revealing that refunding small pots directly to members is likely to reduce future retirement incomes, and would predominantly impact women, ethnic minorities, and lower earners.

Furthermore, it argued that pensions dashboards will complement existing policies by increasing the availability of information to members and reducing the likelihood of lost pots and that a national consolidation system will achieve "more significant improvements” than dashboards on their own.

Indeed, recent industry research has highlighted the "growing need" for pension dashboards to combat lost pots, with over one in eight savers unsure how many pension pots they hold.

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