Saver inertia means scheme led consolidation solutions will be needed to tackle the small pots challenge because member-led solutions will only be used by a minority, according to a report from the DWP’s Small Pot Working Group.
The report says that while ways to support member-initiated consolidation should continue to be explored, automatic and automated solutions for the mass market should be prioritised.
The report says final decisions about which large scale consolidation solution or combination of solutions should be informed by further work on administration process and data standards, as well as customer journey modelling and investigation of the legalities of different structures.
Where pension providers hold multiple pots within charge-capped default funds for the same deferred member, they should. consolidate these pots, or where this is not possible, present a single customer view. The report raises a number of concerns over a lifetime provider model.
The pensions industry should establish operational focussed groups to investigate administrative challenges to member exchange of low value pots between AE providers.
The report recommends two models for deferred members should be prioritised – the default deferred small pot consolidator and the automatic pot follows member model.
The paper says member-led consolidation should be facilitated, sharing structures developed for the Pensions Dashboard initiative, which will see staged on-boarding of pension schemes and providers start from 2023.
But it adds that bulk consolidation without consent will also be needed to solve the small pots problem. The paper calls for the scoping of core minimum viable administrative processes for bulk transfers as well as the identifying of requirements for a low-cost bulk transfer process. Member-exchange proof of concept trials involving low value small pots within master trust schemes should be developed and prioritised, starting with a feasibility report in summer 2021, involving trustees and finance directors.
The Pensions Policy Institute (PPI) estimates that, without intervention the number of deferred pension pots in master trust schemes could increase from 8 million to 27 million by 2035. The current average pot size within master trust schemes is estimated to be around £1,000.
Minister for Pensions and Financial Inclusion Guy Opperman, MP says: “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 automatic enrolment market is a key part of this – but it will take time to develop and implement effective solutions. The Working Group’s analysis and conclusions provides a framework to enable progress. It is clear from their work that more needs to be done by pension providers, working together with regulators and Government, to overcome administrative challenges.
“And I also support the work by providers and others on developing proof of concept trials to help move towards solutions. Alongside working with the pensions industry, the Government will consider the outcomes from the Work and Pensions Select Committee’s examination of the issues. We will also carefully examine international practices to understand approaches most likely to work within the UK landscape. Taken together, this will provide a stronger foundation for change over the medium term.”
Smart director of policy Darren Philp says: “Small pots is an issue that needs solving and this report is an important milestone in understanding the issues and developing a roadmap for the way forward. 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.”
Tisa head of Retirement Renny Biggins says: “A member-initiated solution is likely to only have a limited effect on reducing the number of small, deferred pots, but in the longer term, the Pensions Dashboard will hugely help to increase engagement.
“Before embarking on any provider transfers, it makes sense for providers which administer multiple pots for individuals to consolidate these or at least provide a consolidated consumer view. One of the key determinations will be what size fund constitutes a small pot. This is somewhat subjective and what is deemed small by one may not by another, so some standardisation is required.
“Whatever solutions we adopt, it will be crucial for us to ensure a robust framework is put in place to facilitate quick transfers. TeX (TISA Exchange) has been asked by the ViaNova working group, a collaboration between product providers and third-party administrators in the pension industry, to run a pilot to automate business processes, improve efficiency, reduce risk and lower costs for all participants. TeX will use open standards based on data from the ISO 20022 messaging standards. The pilot is expected to commence in Q1 2021.”
LCP senior consultant Tim Box says: “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.
“We recognise DWP’s view that there may also be a place for member-led solutions but do strongly endorse the statement that automatic solutions will be necessary to complement these.
“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”.”
Aegon head of pensions Kate Smith says: “Making it easier to consolidate pension pots could make a real difference to savers’ retirement outcomes. And cutting administration costs, specifically the costs of making pension transfers, should also over time have a positive impact on charges. Solutions will take time to develop and test, and this report is just the beginning of the journey.”
Nest director of strategy and corporate affairs Zoe Alexander says: “As we move into the next phase of work it is critical we keep the interests of the saver front and centre, and that the inertia principle which has led to the success of automatic enrolment is preserved as far as possible in any solutions we identify.”
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