The Department of Work and Pension has confirmed that pension pots of less than £1,000 will be rolled into a ‘consolidation vehicle’ in a bid to tackle the proliferation of small deferred pensions in the AE market.
The proposals are contained in a DWP consultation update, published today, looking at the issue of small pension pots.
It is estimated that this will cover around 12m pension pots, valued at around £4bn. Pots that have assets of more than £1,000 will not necessarily be covered by this new small pots regime.
However, while there was some clarity on the future direction of travel in regards to this issue, pensions minister Laura Trott says the DWP is inviting further consolation, to ensure there is sufficient evidence to develop large-scale automated consolidation solutions, which will consider a range of options.
Pensions minister Laura Trott says: “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.
“The additional administrative cost for providers managing deferred small pots reduces the value they can deliver for members, while also resulting in potential financial sustainability issues. It is vital that we find the right large-scale solution to tackle this problem so that automatic consolidation of small pots becomes integral to the operation of the automatic enrolment market.”
However while many in the industry welcomed progress on this issue, some thought the limit of £1,000 was too low. LCP partner Steve Webb said: “One of the side-effects of automatic enrolment has been the creation of millions of small, ‘deferred’ pension pots scattered across the pensions landscape.
“It is therefore welcome that the Pensions Minister has reached a decision on a way forward after a decade of debate. However, while consolidation of the very smallest pots into a small number of consolidator vehicles represents a step forward, many people will still find themselves reaching retirement with multiple pension pots.
“Even someone earning just £20,000 per year and making minimum automatic enrolment contributions will build up a pot above the £1,000 limit for consolidation. Once the new system is up and running, further thought will be needed to help ensure that savers can get best value from their DC savings.”
However some pension providers thought the limit was appropriate. Aegon UK head of pensions Kate Smith says:“The government has finally defined the size of what constitutes a small pot at £1,000 for auto-enrolled pots only.
“This will be the maximum limit for automatic consolidation hoovering up around 12 million pots. We believe this strikes the right balance between enabling sufficient consolidation without distorting the pensions market by removing efficient pots and improving member outcomes.”
She adds that it was important that any automatic consolidation process was supported by strong member engagement. “Having multiple authorised consolidators could achieve significant scale quickly, depending on the number of consolidators, making investment in a wider range of assets more viable, including productive finance.
“But this shouldn’t be the only driver. Having a strong authorisation regime focused on value for money and encouraging engagement to prompt members to take more active decisions on investment choice and contribution levels throughout their working lives is key. We need to avoid the risk of automated consolidators becoming pension holding pens with little ongoing investment in member engagement tools and support to help them make active decisions.”
Smith said it was “fundamentally important” that automated consolidators have the highest level of value for members.
The post DWP sets out regulatory plans for small pension pots appeared first on Corporate Adviser.
