Reforms to address small pot issues must strike the "right balance" between improving value for members and creating further autonomy for the government over pension policy in this area, Sackers partner, Jacqui Reid, has said.

Sackers said that automatic enrolment and frequent job switching have led to a surge in small, dormant pension pots, which is a growing challenge for the government.

Currently, there are 13 million defined contribution (DC) pots under £1,000.

These cost over £225m each year to manage, often have high fees, and provide lower value for savers, as well as representing more than £4bn in fragmented retirement savings.

In response to this challenge, ministers have confirmed plans to move ahead with reforms aimed at consolidating the DC pensions market, with a clear ambition to create “fewer, larger, better, well-run schemes”.

The Pension Schemes Bill, published last week, gave the Secretary of State power to mandate the automatic transfer of small, dormant pots into a limited number of authorised consolidators selected through a government-run process.

Under this, a pot will be considered “dormant” if there have been no contributions or member activity for 12 months and initially, only pots up to £1,000 will be in scope.

However, the bill allows this threshold to be increased (or decreased) "relatively easily" through an affirmative procedure rather than through the usual secondary legislation review process.

This provides the government with potential further flexibility to expand the scope of consolidation across a DC market with over £1trn in assets under management.

The government will consult on the regulations for small pots in 2027/28, select a consolidator in 2029, and start transfers in 2030.

Reid said that Sackers welcomed the government’s “much needed focus” on solving the small pots “conundrum”, noting that industry reception to these plans has, so far, been positive.

However, she suggested that there are several as yet unanswered questions about how the consolidator model will operate in the interests of members.

“For example, the size of the small pots will be crucial in determining what impact small pots legislation will really have,” she said.

“Initially, we know pots of up to £1,000 will be in scope for consolidation and will not ‘follow the member’ as they move jobs, meaning members could still end up with a number of low-value, fragmented pension pots just outside of scope (e.g. multiple pots of £1,250). 

“So, the question is whether this is really the ‘game changer’ the Chancellor is hoping for, or whether the pot size will need to be increased over time.”

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