DWP small pots consolidator option 'too complex and risky'

Industry has ‘reservations’ over the DWP’s proposals for tackling the issue of small pots

Holly Roach
clock • 5 min read
DWP small pots consolidator option 'too complex and risky'

Parts of the pensions industry have raised concern around the government's proposals for tackling the issue of small pots, with many pushing for an alternative solution.

In response to its call for evidence in July, the Department for Work and Pensions (DWP) made several recommendations for tackling the small pots issue including launching a default consolidator option to bring a member's deferred small pots together into one pot.

In recent years, the industry has largely shown support for the ‘pot follows member' solution to the small pots issue, with a Professional Pensions poll finding 63% of respondents preferred said option.

Despite an abundance of support among the industry in recent years for this solution, the DWP chose to favour the consolidator model - to the dismay of some.

Complex, risky, expensive

In its response to the call for evidence, Equisoft argued the government's proposals are "too complex, risky [and] expensive", warning they "will take significant time to deliver".

The firm noted it was "surprised by the decision and the reasoning behind the choice by the DWP of a consolidator model". The firm said the pot follows member option is a "much clearer solution" for members, arguing some of the issues cited as to why this is not the right choice "are not adequately resolved by the DWP's proposed solution".

The Pensions Administration Standards Association (PASA) suggested not pursuing pot follows member, or some form of stapling, from the outset "is a missed opportunity".

The organisation noted: "If action isn't taken, there's a real risk the small pots problems will undermine the success of auto-enrolment (AE). At best the issue introduces unwanted and unnecessary inefficiency in the system. At worst it could lead to people receiving less pension income."

Equisoft raised several concerns with the DWP's proposed consolidator model suggesting it relies on consumers being actively engaged which "from experience is unlikely", and that the solution has an "unfair risk/reward profile". The firm also raised concern over the proposed value limits for consolidation.

The government's consultation proposed a framework that would enable a small number of authorised schemes to act as regulated consolidators for deferred pots. In this proposal, the DWP would set the initial maximum limit for consolidation at £1,000, with a regular statutory review.

Standard Life also raised concern over this proposal. Managing director for workplace Gail Izat said: "The government has proposed a default consolidation option, in which any deferred pots under £1,000 will be transferred to a pre-determined consolidation destination. We have a number of reservations with this approach."

The organisation also urged the government to "revisit the concept of pot follows member", because the consolidator model "could run the risk of distorting competition, as the process for selecting consolidators is not yet clear".

The Pensions Management Institute agreed the government's limit of eligibility proposal is not appropriate, arguing the £1,000 maximum limit "is too low".

The firm's response noted: "We can see from the call to evidence that it is estimated that a £1,000 pot would be generated inside 45 weeks. We will experience an ongoing increase in small pots unless we set the limit higher to capture small pots which will be increasing as people earn more with the increase in the national living wage.

"If the £1,000 limit is regularly reviewed with an appropriate index, this may help stem the estimated rise in small pots."

PASA agreed the £1,000 limit "isn't large enough to provide meaningful, consolidated pots for savers".

The association's response said: "By only addressing pot sizes up to £1,000, there will still be millions of small pots over £1,000 which don't provide savers with value for money or protect them from potentially inappropriate investment strategies."

The organisation suggested an active dashboard ecosystem would help savers see their pots and encourage them to take action.

Best solution

Despite some disagreement with the DWP's proposals, it is not all negative.

The People's Partnership said the consolidator model "is the best solution" to tackling the problem which has seen millions of small, dormant pension pots created since the introduction of AE.

The provider said the consolidator option will "help build the scale required to enable pension schemes to invest in illiquid assets" - a key point highlighted in the chancellor's Mansion House speech in July.

While in agreement with the government's proposals in this area, the People's Partnership said it was aware "there is a vast amount of work to do over the next six months to operationalise the framework".

Director of policy Phil Brown said: "The growing number of small, deferred pension pots has become an increasing concern for the industry, and we are pleased that the DWP has offered a solution which works in the interests of savers.

"Our main reason for support of this proposed solution is that it will hold consolidator schemes to a higher regulatory standard, which will only improve outcomes for savers."

He suggested the core processes needed to make consolidators work are "very similar to the processes needed to make pot follows member work", noting while tis detail to work through, "the consolidators proposal looks achievable and no harder than anything else that was on the table".

The Pensions and Lifetime Savings Association argued the consolidator option produces both pros and cons, "as there are with all the options", but the organisation said these "will only become fully clear when the next phase of more detailed work is undertaken".

Its response noted: "Much more detail is required before the industry can fully assess the viability of this model, but our members have expressed satisfaction with it."

The PLSA warned it is "critical" for the industry to be involved in the next stages of the initiative and offered support for the launch of a delivery group to design principles and implementation of the default consolidator framework.

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