The Government is seeking feedback from the pensions industry on two possible solutions to the small pots problems within the auto-enrolment market.
Its latest ‘call for evidence’ is asking whether a pot-follows-member or ‘default consolidator’ option would be the most efficient and cost-effective way to reduce the burgeoning number of small pots and help deliver better retirement outcomes for savers.
However there are frustrations that this latest call for evidence, which will be followed by a further consultation period, will mean that any practical solution to this problem is still a number of years away – particularly as the data suggests that the value of these lost pensions is now almost £27bn.
Setting out the benefits and potential drawbacks of each scheme, the government says that the ‘pot-follows-member’ solution is likely to resolve much the small pots issue. It says this option has the advantage of “building on the existing system, rather than requiring the creation of consolidators” – which would need to be effectively regulated. This solution was originally proposed by the 2014 Coalition Government, but never made it onto the statute books.
However, the DWP now points out that this model may, in some cases, create additional significant complications for employers, members and providers — particularly around those with multiple jobs who are contributing to more than one AE plan.
It adds that there’s also a risk, dependent on maximum pot value limit set, that members could reach this limit relatively quickly so the pension pot does not necessarily transfer when they move job – resulting in members still accumulating various deferred pension pots, albeit of greater value than is the case now.
The ‘default consolidator’ model would see smaller pots transferred automatically to a third party. This may be one of a number of new consolidators, or potentially one of their existing AE providers. One possibility is that consolidation happens to the scheme members first used within the AE system. The Government noted this approach could remove a considerable number of deferred small pots from current workplace pension schemes, and it would require relatively little involvement from the member.
However it also pointed out that there would need to be a robust authorisation regime, around any consolidator companies, which are likely to grow rapidly. The government noted that with multiple consolidators there is an administrative burden in working out if a member already has a pension plan. This is removed if there is a single consolidator, however, concerns have been voiced across the industry that a very small number, or single, consolidator could have a distortive impact on competition in the workplace pension market.
The government points out that an solution is needed given the Pensions Policy Institute estimates that within the master trust DC market there were 8m deferred pension pots in 2020, and this figure would rise to 27m by 2035 without action.
Launching this call for evidence, pensions minister Laura Trott said “The growth of small pots means there is undue cost and inefficiency in the pension system. It creates a risk that deferred members lose track of their workplace pension savings – acting as a disincentive to member engagement. And it creates a cross subsidy risk for members with larger pots, which may impact their retirement outcomes.”
Commenting on this call for evidence Pensions and Lifetime Savings Association (PLSA) head of DC, master trusts and lifetime savings Alyshia Harrington-Clark says: “The Government has rightly recognised that efforts need to be made to address the small pots issue, which is detrimental to savers, and causes market inefficiencies. If unaddressed this could lead to over 20 million small pots by the end of the decade.
“We are pleased to see many of the recommendations from the PLSA and ABI-convened Small Pots Co-Ordination Group – which comprised of a range of pension providers, industry, regulatory and consumer bodies and stakeholders – progressed today.
“Industry has and will continue to work hard to support Government efforts to resolve to these complex problems for the future of consolidating small pots and implement mass market automatic enrolment solutions.
However former pensions minister and partner at LCP Steve Webb said there was a need for action now, not further consultation. He pointed out that the 2014 Pensions Act included legislation for a ‘pot follows member’ system, but this was not implemented after the 2015 election.
He adds that the Department of Work & Pension has already led a small pots working group, which was set up in 2020 and in March 2021, a ‘small pots industry co-ordination group’ was set up by government ministers and led by the ABI and PLSA.
He says: “Whilst it is welcome that the Government is seeking to address the small pots issue, it is time for the DWP to get off the fence and take action.
“It has been obvious since the start of automatic enrolment that small pots would be an issue which is why the 2014 Pensions Act provided for a pot-follows-member solution. Unfortunately this was not seen through and, nearly a decade later, we are still at the stage of ‘calls for evidence’ followed by further consultation. What is needed is for someone to take a decision and move ahead with implementation.
“The ‘pot follows member’ option was always an attractive one, meaning that member pensions would be consolidated with their current provider, possibly on very favourable terms. The creation of a pensions dashboard infrastructure which links together all of an individual’s pensions would make a pot follows member solution much easier, and there is now no reason not to move ahead. It is time to move on from ‘analysis paralysis’ to action”.
Trott said the government welcomed the previous work on this issue and said this latest call for evidence looked to build on this.
“This call for evidence focuses on deepening the evidence base around two large-scale automated models for the consolidation of deferred small pots: default consolidator/s and pot follows member. We will assess the evidence to identify and develop an approach which puts the interests of members first by facilitating easy consolidation of deferred pensions, mindful that the approach needs to work for the whole of the automatic enrolment market. We will consider the shape and approach of legislation required, build a cost/benefit analysis, and consider the impact on the market of the potential solutions to inform our thinking.
“I am determined to drive the agenda forward to help ensure that a better functioning and more efficient pension market meets the needs of more engaged members.”
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