Experts share proposals to solve small pension pots problem

An industry group has recommended several ways to consolidate small pension pots in the auto-enrolment market.

Costs for schemes to administer deferred small pots has been mounting and presents potential risks to savers.

It is estimated by the end of this year, there are likely to be more than 11 million small, deferred pots in total.

Also, without any change in the next 10 years, that figure will likely double again.

Now the Small Pots Co-ordination Group has published its spring 2022 report to address the matter.

It includes experts from the Department for Work and Pensions (DWP) alongside a range of pension providers and consumer bodies, and stakeholders.

The group was set up to tackle the growing issue of small pots being accumulated by people working in multiple jobs over the course of their career.

The three proposals to be taken forward include:

• The Pot Follows Member model means that when an employee moves jobs, their deferred pension pot in their former employer’s scheme automatically moves with them to the new employer’s scheme, with the opportunity to opt out.
• Under the multiple Default Consolidators model, certain pots will automatically be transferred to a small pot consolidator, with savers being given an opportunity to opt out.
• The Member Exchange model, whose principles have been tested with three master trusts, identifies a small deferred pot in one master trust and an active pot in another master trust and merges the two into the active pot.

The group has also suggested that a combination of these three models may be the best approach.

But further legislation will be needed for the proposed model(s) to work.

Additional analysis on the three models by industry and government is now needed to understand which offers the best outcome for savers.

Pensions minister Guy Opperman said: “Given the risks that the growth of deferred small pots presents to savers and their ability to plan for retirement, it is vital that we find the right solution.

“I thank the Small Pots Co-Ordination Group for their recommendations and look forward to continuing the close collaboration between regulators, pension providers, industry bodies and stakeholders as we collectively work to ensure the record number of Brits now saving for a pension can achieve the best retirement possible.”