Industry welcomes small pension pot recommendations with sense of déjà vu

The pensions industry has welcomed the small pots working group’s report outlining recommendations to tackle the issue and emphasised the importance of building momentum.

The cross-sector working group, chaired and facilitated by the Department for Work and Pensions (DWP), encouraged the government, industry and regulators to work collaboratively in addressing the increasing number of small, deferred pension pots in the auto-enrolment (AE) market.

“We are pleased to see industry working together with government and regulators on the issue of small pension pots,” said The Pensions Regulator executive director of regulatory policy, analysis and advice, David Fairs.

“Our strategic goal for members of DC schemes is savers get good value for their money and this means costs and charges must be kept at a reasonable level. We look forward to continuing to work with industry and government to ensure any solutions developed will be in the best interest of all DC members and will deliver improvements in the value of savers’ outcomes.”

The Investment and Saving Alliance head of retirement, Renny Biggins, said the organisation agreed with the secure and automated solution proposed, although he warned that the member-initiated solution was likely to have a limited effect on reducing the number of small pots.

PLSA head of DC, master trusts and lifetime savings, Lizzy Holliday, added that the PLSA welcomed the “additional impetus and ambition” to tackle the issue.

She continued: “We welcome the direction of travel and solutions indicated – such as focusing on options that work well with AE, member exchange pilot, and moving to improve pension administration to facilitate cheaper, more efficient, transfers.”

The working group’s proposals were “sensible”, according to LCP senior consultant, Tim Box, who endorsed the suggestion that automatic solutions would be necessary to complement member-led solutions.

“The key point now is for the DWP to press on and keep the momentum going so that the erosion and misplacing of small pots is reduced as quickly as possible,” he added. “It is vital that at least one of the solutions is implemented as soon as possible – in this case ‘done is better than perfect’.” 
  
AJ Bell senior analyst, Tom Selby, said that the DWP had “jumped in its very own DeLorean and travelled back in time” to address the increasing number of small, deferred pots.

“Automatic transfers were first proposed to address this problem in 2013, before being dropped in part due to concerns over complexity and risks that members would end up losing out as a result,” Selby continued.

“In its place came pensions dashboards reforms, which should eventually allow people to see all their retirement pots in one place.

“While dashboards may help people know where all their pensions are, they will not address the issue of small pots being eroded away by flat-fee charging structures. 

“Such a situation is clearly viewed as untenable by the government, in part because it risks creating a slew of ‘pension rip-offs’ headlines that could undermine trust in AE.

“However, this risk also exists with auto-transfers. If, for example, someone’s pension is moved to a higher charge or lower quality scheme without their input, they might understandably feel aggrieved. 

“It is perhaps for this reason that the DWP is treading extremely carefully, at this stage only asking the industry to come up with solutions rather than attempting to rush through legislation.” 

The roll out of pensions dashboards will be key in addressing the small pots problem, according to Association of British Insurers assistant director, head of long-term savings, Rob Yuille.

“But automatic solutions will be needed too, and the ideas proposed today are a welcome further step,” he noted. “This has been a collaborative process which we hope to see continue, as it is important that any solutions work across the whole AE market.” 

Dalriada Trustees professional trustee, Paul Tinslay, concluded: “The cost of the developments is an important consideration for providers, with single member portals at the provider level and the national dashboard. 

“Interestingly this means that the consolidated member’s pension pot will need to tell the member where it is, a reverse of the position we have had so far, where the member has needed to tell the pension provider(s) where they are.” 

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