Industry group outlines trifecta of recommendations to tackle small pots issue

The Small Pots Co-ordination Group has published its spring 2022 report, outlining three potential solutions to address the increasing number of small, deferred pension pots in the auto-enrolment (AE) pension market.

The group, which includes experts from the Department for Work and Pensions (DWP), several pension providers, industry, regulatory and consumer bodies, and stakeholders, was set up to tackle the issue being caused by people working multiple jobs over the course of their careers and being auto-enrolled into multiple schemes.

It recommended that a ‘pot follows member’ model should be used when an employee moves jobs, whereby their deferred pension pot in their former employer’s scheme automatically moves with them to their new employer’s scheme, with the opportunity to opt out.

A multiple ‘default consolidators’ model was also recommended, which would see certain pots being automatically transferred to a small pot consolidator, with the saver given the option to opt out.

The group noted that this model comes with a variety of design choices, although it discounted the idea of a single default consolidator.

Thirdly, it proposed a member exchange model, which would identify a small, deferred pot in one master trust and an active pot in another, and merge the two into an active pot.

The group suggested that a combination of these three models may be the best approach, although it acknowledged that further legislation would be needed for the models to work.

It noted that the member exchange pilot had identified that creating a framework for transfers without savers’ consent was not possible at this stage.

Therefore, the group has recommended that legislation be brought forward that compels relevant providers to take part in the solution, defines the pots in scope and defines the liability model.

Contract-based providers in the AE market should also be enabled to carry out non-consented transfers, the group recommended.

Further analysis on the three models by the industry and government is needed, the group noted, to help understand the best outcome for savers.

It said that this should include which models consumers prefer, and their cost and effectiveness in reducing the number of small pots.

Additionally, this analysis must consider the impact of any future model on the structure and sustainability of the pensions market, it stated.

"Given the risks that the growth of deferred small pots presents to savers and their ability to plan for retirement, it is vital that we find the right solution,” commented Pensions Minister, Guy Opperman.

“I thank the Small Pots Co-Ordination Group for their recommendations and look forward to continuing the close collaboration between regulators, pension providers, industry bodies and stakeholders as we collectively work to ensure the record number of Brits now saving for a pension can achieve the best retirement possible.”

Association of British Insurers assistant director, head of long term savings policy, Rob Yuille, said: “The number of inactive small pots is rising rapidly, driven by automatic enrolment over the last decade.

“If this is left unaddressed, pension savers could lose track of their money and may not get the most out of their retirement savings. Pensions dashboards may increase the number of member-initiated transfers, but that is unlikely to go far enough to fix the problem.

“As an expert group we have identified viable models which should be taken forward. The evidence shows that compulsion will ultimately be needed for a whole of market solution that benefits all savers.”

PLSA deputy director of policy, Joe Dabrowski, added: “Supported by the expertise of pension providers, regulatory and consumer bodies, the Co-ordination Group has made significant progress in setting out a pathway to solve the small pots issue once and for all.

“Left unchecked, the number of small pots is set to more than double to 27 million by 2030 with implications for the engagement and understanding, as well as the retirement outcomes, of affected savers.

“All the evidence indicates that a successful, long-term solution will need a legislative footing. Given the expanding number of pots it will be important to take forward a solution quickly, and we look forward to working with government to make this happen.”

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