The Department for Work and Pensions (DWP) has announced a new regulatory framework to help solve the issue of smaller pension pots.
Minister for pensions Laura Trott said the proliferation of small pots has been a “challenging issue” for the automatic enrolment pensions market.
Without intervention, she added, deferred small pots will result in “wasted administration costs” of a third of a billion pounds per year by 2030 for pension schemes.
“This severely reduces the value for money they can provide to their members,”
In January, the DWP launched a call for evidence – ‘Addressing the challenge of deferred small pots’ – which sought input from the pensions industry on the way to address the growth of these deferred small pots.
In a consultation document published today (11 July), the DWP set out its proposed framework for the chosen model, which will enable a small number of authorised schemes to act as consolidators for deferred small pots.
It said the multiple default consolidator model “has the potential to provide greater net benefits to members, ensuring that members eligible deferred pots are consolidated into one scheme”.
The DWP recognised that the multiple default consolidator model would not put a complete stop to small pension pots either.
In the longer-term, another solution to the issue of smaller pension pots could be a “pot for life”.
With regard to the other two options the DWP was considering – default consolidator and pot follows member approach – the department stated they would not “truly eliminate” the flow of deferred pots.
Quilter head of retirement policy Jon Greer said: “Our working habits have drastically changed over the last few decades. Previously people might have had one or two jobs during their lifetime and as such one or two pensions attached to them.
“Now people are moving to multiple employers over the course of their working life and as a result of auto-enrolment are also building up multiple pensions sometimes with not that much in, also known as ‘small pots’.
“This unintended consequence can make retirement saving even more complicated and may actually cost savers money.
“The government are therefore understandably wanting to ensure the market is working best for savers in this regard and are laying the groundwork for a shake up to auto-enrolment and put savers at the heart of the policy.”
Aegon UK head of pensions Kate Smith added: “Having multiple authorised consolidators could achieve significant scale quickly, depending on the number of consolidators, making investment in a wider range of assets more viable, including productive finance.
“But this shouldn’t be the only driver. Having a strong authorisation regime focussed on value for money and encouraging engagement to prompt members to take more active decisions on investment choice and contribution levels throughout their working lives is key.
“We need to avoid the risk of automated consolidators becoming pension holding pens with little ongoing investment in member engagement tools and support to help them make active decisions.”
Greer also detailed that “Its estimated that in 2022 the value of lost pots had reached £26.6bn, which could have been avoided.”
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