Philp: Small pots is an issue that needs solving
The small pots working group has made a number of recommendations on how to tackle the growth of deferred members with small pension pots within the AE pensions market – urging the government and industry to take action to enable large-scale mass transfers.
The taskforce - launched by the Department for Work and Pensions (DWP) in September - was set up to examine the scale and nature of deferred, small pots - looking at the whole of the auto-enrolment (AE) pensions market, with a particular focus on master trust schemes.
In a series of recommendations published today, the working group said the government, regulators and industry should continue to explore and enable opportunities for member-initiated consolidation, but cautioned that member-led transfers alone were unlikely to change the trend in the growth of defined contribution (DC) deferred pots.
As such, it said the government and industry should work together to prioritise action on enabling "automatic and automated" large-scale, low-cost transfers and consolidation for the AE mass-market. It said member safeguards should provide proportionate protection, but "not act as a barrier".
The scale of small pots problem was highlighted by a Pensions Policy Institute report in July 2020, which estimated the average pot size within master trust schemes was approximately £1,000. Further analysis by the DWP between August and September this year into the books of five of the largest DC providers - encompassing 11.2 million deferred pension pots - found almost three-quarters (74%) of all deferred pots in the sample were smaller than £1,000 while a quarter (25%) were smaller than £100.
In order to enable this, the working group recommended the industry should, as a first step, set up groups to investigate and address administrative challenges which will be necessary to underpin mass transfer and consolidation systems that can be delivered at scale within the AE market - working on identity verification issues, identifying the requirements for a low-cost bulk transfer process and developing common standards.
The group also recommended launching proof of concept trials into member-exchange following a feasibility report in summer 2021.
The report stopped short, however, of recommending an exact model for future consolidation - saying that, final decisions should be informed and developed following the pensions industry's investigation and examination of administration processes and systems through its operational group - but discussed a number of areas it would investigate, including same provider/scheme consolidation, member exchange, default consolidator and automatic ‘pot follows member'.
Commenting on the publication of the report, minister for pensions and financial inclusion Guy Opperman said the growth in the number of deferred small pots and the impact of this on the consumer was an issue the DWP is determined to address.
He said: "My ambition is that scheme members should be able to realise the best possible outcomes from their workplace pension savings.
"Consolidation of deferred small pots in the AE market is a key part of this - but it will take time to develop and implement effective solutions."
Opperman added the working group's analysis and conclusions would provides a framework to enable progress but added it was clear from the report that more needed to be done by pension providers, working together with regulators and government, to overcome administrative challenges.
In the report the working group said: "In the Working Group's view, the strategic goal for the government and the pensions industry, over the medium term, should be to make consolidation of deferred, DC small pots the norm within the AE workplace pensions market.
"This would support an efficient, competitive and transparent workplace pensions system for the benefit of scheme members. It will necessitate automatic and automated solutions, which can complement member-initiated transfers and consolidation. Recognising the complexities and trade-offs involved in various consolidation options however, workable solutions will take time to develop and implement at scale."
Reaction
Pensions and Lifetime Savings Association head of DC, master trusts, and lifetime savings Lizzy Holliday said the trade body welcomed the additional impetus and ambition from government on this issue as well as its engagement with the industry.
She said: "We welcome the direction of travel and solutions indicated - such as focussing on options that work well with auto-enrolment, a member exchange pilot, and moving to improve pension administration to facilitate cheaper, more efficient, transfers.
"The PLSA are excited to continue working with our members next year on implementing the actions recommended in the roadmap as well as with the government and the wider industry on shaping key next steps. Crucial to these is the need for more developed cost benefit analysis - to consider the impacts on saver journeys and the shape of the pensions landscape of the various models that remain in play, prior to further government decisions."
Smart director of policy Darren Philp said small pots is an issue that needs solving but noted this report was an "important milestone" in understanding the issues and developing a roadmap for the way forward.
He said: "We agree that we need to sort the administration issues concerning transfers and make the whole process more efficient and think technology has a vital role to play here.
"The report reignites the debate of consolidators versus pot follows member solutions to the small pots issue, but whatever solution is agreed upon, making transfers more cost effective is a prerequisite. We look forward to engaging with the DWP, regulators and the wider industry to help develop a system that works to deliver better outcomes for all concerned."
The People's Pension head of policy Tim Gosling agreed: "This report lays out a workable roadmap for dealing with the small pots problem. The scale of the challenge is significant: without action the problem will become much harder to manage and will destroy value for members. We welcome the minister's support for industry to lead on proof of concept trials, including support for the member exchange pilot."
LCP senior consultant Tim Box stressed the need to make progress, recognising that there was no perfect solution to the issue.
He said: "The working group has overall made a sensible range of proposals to be further investigated. Some such as "same provider/ scheme consolidation" should be relatively "quick wins" to start the ball rolling.
"The solutions potentially having much greater impact such as member exchange, default consolidator and automatic pot follows member will require more analysis and planning."
He added: "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. It is vital that at least one of the solutions is implemented as soon as possible - in this case done is better than perfect."
