The government has unveiled reforms to combine small pension pots as part of its Pension Schemes Bill.
Under the reforms, an individual’s small pots will be brought together into one pension scheme in order to deliver good value. People will retain the right to opt out.
The aim is to tackle small, forgotten pension pots that employees accumulate as they move between employers. There are now 13 million of these pots holding £1,000 or less, increasing by around one million a year. Overseeing these costs the pensions industry around £225 million.
The government’s reforms will increase the pension pot of an average earner by around £1,000, cut costs for savers, and make it easier to keep track of pensions.
This follows the work of the Small Pots Delivery Group, which highlighted the need for a Small Pots Data Platform to identify and source: pension pots that could be consolidated, safeguards for savers whose pension pots would be consolidated which include a member opt-out option, and a framework setting out the rules a scheme would need to follow to become a consolidator scheme. These rules would include already being in an automatic-enrolment qualifying scheme, having a specified level of scale to manage expansion, providing good value for money for members and providing additional protection for members from flat fee charges.
The Pension Schemes Bill is set to be introduced into Parliament later this Spring.
Torsten Bell, minister for pensions, said: “We will automatically bring together people’s small pots into one high-performing pension, reducing costs as well as hassle for savers. In time, this could boost the pension of an average earner by around £1,000 as part of our Plan for Change to put more money in people’s pockets.”
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), added: “The PLSA has worked extensively with industry and the DWP [Department for Work and Pensions] to propose solutions and supports the model being proposed by the government. We look forward to working on delivering the recommendations of the Small Pots Development Group.”
Hannah English, head of DC [defined contribution] corporate consulting at Hymans Robertson, said: “While this is a welcome step in the right direction, there are practical barriers such as the re-use of PDP infrastructure and processes which must be considered. The Feasibility Review will have to review these challenges carefully to surpass these barriers. Looking ahead, the proposed deadline of 2030 for this consolidation to be in force would be a great achievement for members’ benefits if it is met. We look forward to seeing further insights in the forthcoming Pensions Bill and progression on the wide range of policy developments already in progress, as well as a clear timetable with detailed terms of reference for the second stage of the pensions review to address pensions adequacy of members.”
Pete Glancy, head of pensions policy at Scottish Widows, added: “The proposal to consolidate small pots will help reduce industry operating costs and could lead to lower charges in the future for retirement savers. Reducing the number of smaller pots could also help boost engagement levels, with savers less likely to feel overwhelmed by the number of pots they have from previous employers.”
Lizzy Holliday, director of public affairs and policy at Now:Pensions, said: “We believe the multiple default consolidator model works best for savers compared to other models explored as part of the overall policy development process. It enables a longer-term relationship between the member and the scheme, and prevents pots becoming stranded when they reach a certain level. This means savers can keep track more easily and understand how prepared they are to retire.”
