Deferred pension pots could reach 27 million by 2035 - PPI

The number of deferred pots could grow from eight million to 27 million by 2035 if the issue is not tackled by policy changes, according to the Pensions Policy Institute (PPI).

A research report from PPI featured projections that this would dwarf the nine million active pots in 15 years’ time, with the issue of small deferred pots being an aggravating issue for both members, as charges can easily erode the pots over time, and providers, as small pots can be “uneconomic” to manage.

PPI projected that, by 2035, master trusts will be spending £1bn on managing both active and deferred pots, while member charges will have reached £1.2bn.

PPI stated that financial instability in master-trust schemes caused by too many small pots could even result in trustees triggering an event to wind up the scheme.

The report examined several ways in which the number of deferred pots might be reduced, finding that a combination of policies might be the best way to maximise benefits while minimising potential drawbacks.

The most effective individual policy was found to be the ‘lifetime provider model’, which would see members remain with the same provider throughout their adult life and result in there being just three million deferred pots by 2035.

A ‘pot follows member’ policy, under which pots move with members to new employer’s schemes, was the second most successful, resulting in five million deferred pots, according to PPI modelling.

These two were therefore found to be most effective at reducing costs to members and providers, with both projected to cut member charges down to £0.7bn or less and provider costs to £0.93 or below.

The other policy options considered were ‘same provider consolidation’, under which returning members would be re-enrolled into their deferred pot, ‘member exchange’, a different form of ‘pot follows member’, and ‘default consolidator’, where one year of deferment results in a transfer to a consolidator.

Dashboards were also considered as an option, with the report concluding that the online pension platforms would be well-suited to complementing other policy options but rather ineffective independently.

The report warned that the policy models were likely to increase the administrative burden on employers or providers and noted that the lifetime provider model would involve significant systemic change and could result in some schemes receiving a competitive advantage.

PPI senior policy researcher, Mark Baker, said: “Most of the options would involve some overhaul of current practices, and any change would require strong consensus amongst providers and legislators.

“A combination of several approaches, supported by pensions dashboards, might help members and industry to achieve potential benefits, while avoiding some of the potential pitfalls involved in the different approaches.

“What is certain is that change is needed and needed soon if savers are to receive the full benefits from workplace pensions, and this report aims to contribute to a much-needed debate about how best to achieve necessary reform.”

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