Employment trends risk exacerbating small pots issue

Pension providers, defined contribution (DC) scheme trustees and employers have been urged to consider the impact of employment trends on the proliferation of small, deferred pension pots and assess what they can do to protect members.

ZEDRA client director – pension trustee & governance, Dan Richards, noted that as employer demand for talent has “ballooned”, especially in high-turnover industries, job vacancies and short-term roles are likely to exacerbate the small pots issue.

He warned that evolving employment patterns alongside auto-enrolment meant even more small pots will be created over time, with the Department for Work and Pensions estimating that there will be around 50 million deferred DC pots by 2050.

“Pots of less than £100 are now protected from charges but this won’t help everyone,” said Richards.

“If members with deferred small pots are seeing their savings shrink rather than grow, then it is important to help members consider other options.”

Richards urged schemes and employers to engage with deferred members so they are aware they have a pot with the scheme and how it could fall in value over time, noting that pensions dashboards should help people keep track of their old pensions.

He also called for members to be helped with understanding their options and encouraged asking advisers to find ways to help members.

“For schemes with high member turnover, managing small pots can affect wider scheme governance. If the cost of dealing with small pots is having a detrimental effect on other aspects of the scheme, such as quality of member communications or investment strategy, it is time to think seriously about a different approach as this will affect value for all members,” Richards added.

He urged schemes to explore options in more depth, noting that the pensions industry was seeking options for schemes with the Small Pots Cross-industry Co-ordination Group.

In June, the Small Pots Cross-industry Co-ordination Group published its spring 2022 report, outlining three potential solutions to address the small pots issue.

Richards also highlighted the importance of trustees and employers understanding the size of the problem in their scheme and to consider another provider for small pots.

“It may be possible to transfer small, deferred pots into a master trust or other arrangement,” he said.

“However, trustees may find that many master trusts are unwilling or unable to only accept deferred pots, not least because master trusts are already disproportionately affected by small pot problems among their own memberships.”

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