Lane Clark and Peacock (LCP) has urged the government to “look again” at the idea of ‘pot follows member’ to fix the burgeoning number of small pension pots getting lost.
The consultant suggested this idea offers the best prospect of solution to the small pension pot problem.
This comes after Department for Work and Pensions select committee chairman and MP Stephen Timms wrote an open letter to industry members inviting them to find "workable solutions for consolidating very small pension pots".
In her response, LCP head of defined contribution consulting Laura Myers noted the issues with doing nothing about the growing number of small pots, including the lack of engagement from members with pensions if pot sizes are small and that overall running costs are greater.
She also note the potential reputational damage to the industry that could be caused if flat fee structures were to erode the value of these small pots.
Timms' letter notes that in a system largely based around inertia, it seems unlikely that individual members will think it worth the hassle of spending time consolidating small pensions.
The letter reviews the options for ‘member-led' consolidation, then looks at two main approaches to ‘automatic' or ‘default' consolidation - the idea of a single pension pot for life and the ‘pot follows member' approach where small pots are moved to the current active pot unless the member opts out.
When polled by Professional Pensions this week for Pensions Buzz, close to two-thirds of the industry agreed they would like to see flat-fee structures on low-value pots scrapped.
LCP said the advantage of pot follows member for these very small pots is that it "does not rely on member engagement".
Myers said: "There is no doubt that having tens of millions of small pension pots scattered around the pensions landscape is not sustainable. It is costly and inefficient and could undermine the drive to get members to engage with pensions.
"Ideally, members would consolidate their own pensions where appropriate, but in a system based largely around inertia it seems unlikely that relying on members to solve this problem for themselves will be effective.
"Just as auto-enrolment works by putting in place defaults which are right for most people most of the time, so solving the small pots problem needs to be based around automatic mechanisms, whilst preserving the right of a member to opt out."
She continued: "Having one pot for life would involve major upheaval in the current system and could lead to providers ‘cherry picking' those with larger pension pots and offering worse terms to lower earners. There would also be considerable ‘deadweight' cost as providers competed to win the most lucrative business.
"A more incremental solution would be to revive the idea of ‘pot follows member' where small pension pots automatically move to the new provider unless the member actively opts out. This is an approach which the public will understand and could help to deal with this growing problem."
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