PLSA guest comment: Resolving the small pension pots issue

The small pots challenge has been rattling around since the early days of automatic enrolment – what to do for the best for deferred or in-active members who have low levels of savings?

As time moves on the small pots multiply – and the impact of Covid is likely to see a further significant uplift. Numerous solutions have been considered, but none to date have taken off.

Today’s (22 September) announcement of a cross industry and government working group is therefore to be welcomed in seeking a broad consensus in identifying a way ahead.

Small pots don’t generally work for savers. Some savers value their small pots, but leaving small inactive pots behind when changing jobs is not likely to be an optimal way to save for retirement.

The impact of charges on multiple small pots for a saver can also be detrimental over time, and the possibility of savers losing track of their savings is also a concern.

Having numerous small pots can create an overwhelming quantity of communications for an individual - which is not always helpful to building good engagement.

Small pots can also drive some economically inefficient decisions. Evidence suggests that those savers with larger pots are more likely to use their pot to derive an income rather than take their pot as cash.

We think the dashboard will help savers find and understand their savings - it will mean that savers won’t lose their pots, and will be able to see them altogether in one place. But we don’t think this will be enough to address the small pots challenge.

We have therefore been part funding PPI Project CLAIRE (now Pensions Data Project) to support better data and evidence on this issue. We have also been working with our master trust community reviewing available evidence, developing objectives and principles that we think are key to a successful solution, and exploring the numerous potential options.

Some familiar old favourites have surfaced again as potential solutions – including those that made their debut in NAPF work as far back as 2012.

Our most recent ideas and assessments suggest innovative, technological solutions may be beneficial in supporting the delivery of good value transfers and overcoming the inefficiencies of member identification and matching.

We don’t think that consolidation should solely rely on pro-active engagement by savers, and we consider member protection is paramount for both savers and trustees.

It’s possible that more than one solution might be appropriate. Perhaps for some options to deal with the current already existing small pots.

With other approaches to tackle and prevent the initial proliferation arising in the future – perhaps from one or maybe two specific main cause triggers. It might also be possible to move quickly under existing frameworks to act for savers now - while seeking a more holistic solution further down the line for savers in the future.

The impetus and ambition to act is clear from our members – as the number of small pots grows the problem becomes larger. We could see from the DWP consultations on costs and charges, and general levy, that the small pots issue was rising up the government agenda - and we’d urged the government to think holistically with the industry about the causes and not just the symptoms of the small pots problem.

We are pleased to be able to explore and develop further what the art of the possible might be in this space – representing our member views into the heart of a broader discussion to address small pots - and potentially embarking on another new chapter in the automatic enrolment story.

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