The Department of Work and Pensions has confirmed it will create a small pots consolidator, due to be in force by 2030, which will automatically merge deferred AE pensions of less than £1000.
The consolidation model will be known as the small pots data platform. It is estimated that there are now 13m small pots of this size, with the number increasing by around one million a year.
Details were confirmed in the DWP’s response to an industry consultation, on this issue, with reforms being introduced as part of the forthcoming Pensions Schemes Bill.
The DWP said it will set up a framework to outline what providers will need to do in order to qualify as one of these consolidator schemes. But in confirmed they will need to already be an AE-qualifying scheme, in addition to having a specified level of scale to manage expansion, and demonstrate they provide good value for money for their members, while offering additional protection for members from flat fee charges.
Savers will have the option to opt-out of this consolidation.
Announcing these plans the DWP says this model will cut costs for savers and make it easier to keep track of pensions, helping to boost living standards in retirement. DWP estimates says this will boost retirement savings for the average worker by £1,000 and save the industry around £225m a year in unnecessary administration costs.
The move has been broadly welcomed by the industry. The Pensions and Lifetime Savings Association director of policy and advocacy Zoe Alexander says: “The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike. The PLSA has worked extensively with industry and the DWP 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 and are pleased the Government is tackling this long-standing issue in the Pension Schemes Bill.
Standard Life managing director Gail Izat adds: “The number of small pots in the system is growing at a rate of knots and ultimately heightens the risk that people will lose track of their hard-earned savings.
Aegon head of pensions Kate Smith adds: “The Pension Schemes Bill will include a package of reforms, including a new duty on schemes to enable the automated consolidation of small, deferred pension pots, valued at £1,000 or less, into authorised default consolidators.
“This Small Pots Delivery Report sets out recommendations on how best to implement the model. It’s clear that there’s still a lot of work to be done to determine the authorisation and supervisory framework, design, delivery and implementation of the small pots regime.
“The government intends to build on the master trust authorisation regime to enable master trusts to apply to become default consolidators. It’s expected the FCA will develop a regulatory framework for GPP providers.
“One key element is a feasibility review of the Small Pots Data Platform digital infrastructure, which will be led by the PLSA. Previously described as the ‘clearing house’, this is a critical component of the proposed small pots regime, as it will be responsible for data matching and verification, and identifying or allocating a default consolidator.
“The new duty on schemes to transfer small, deferred pots to authorised consolidators is due to be effective from 2030 and it’s likely this will then be phased in over a few years.
“ We believe this is a reasonable timeframe given the other reforms the Government intends to deliver including pension dashboards, the value for money framework, and its pension scale objectives. These will lead to scheme-level consolidation as well as having an impact on future authorised default consolidators, so need to be delivered first.”
Hargreaves Lansdown head of retirement analysis Helen Morrissey adds: “Moves to implement a multiple default consolidator model – now known as the Small Pots Data Platform – could prove to be a real gamechanger. In scooping up these pots the platform can reduce costs for providers and significantly improve outcomes for members.
It’s easy to lose track of these small pots but over time they can grow and make a big impact on your overall retirement saving. Letting members know these small pots have been allocated to one provider reminds people about the existence of these important savings, gives them a better understanding of what they have and this can massively boost engagement.”
She adds that these reforms will require rigorous standards around data and security to deliver a high-quality service that members can trust.
Morrissey adds“The proposed deadline of 2030 for transfers to begin is punchy but the group is looking at what can be replicated from other projects to improve efficiency and reduce cost. One example is the industry’s experience of preparing for the Pension Dashboard which means the quality of member data has significantly improved.”
Announcing the reforms the pensions minister Torsten Bell said: “It’s great news that more people are saving for their retirement. But I want to make pension saving as simple and rewarding as possible.
“There are now more small pension pots in the UK than pensioners – raising costs and hassle for workers trying to track their savings. It also costs the pensions industry hundreds of millions of pounds every year.
“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.”
