The complex issue of small DC pension pots requires many solutions says The Small Pots Co-ordination Group, the body responsible for developing practical solutions to the proliferation of small deferred pension pots.
The industry driven group, created by Pensions and Lifetime Savings Association (PLSA) and the Association of British Insurers (ABI), has published its first progress report containing a series of recommendations covering administrative issues, factors of assessment of future consolidation models and implementation of future consolidation models.
It recommends that solutions should address the existing stock of small pots and stem the flow of small pots from new schemes. Solutions should also consider trust-based and contract-based pension pots as well as provider driven solutions and member driven consolidation to eliminate member detriment.
Minister for pensions and financial inclusion Guy Opperman says: “I am pleased to support the publication of PLSA and ABI’s small pots co-ordination group report. This report enables us to further understand the positive progress that is being made by the small pots industry group to tackle the administrative challenges of deferred small pension pots. I encourage the industry to continue in their efforts to understand how far they can progress consolidation solutions within the existing legislative framework.”
Small Pots Co-ordination Group chair Andy Cheseldine says: “I am very impressed with the progress the group has made so far in getting to grips with the complexity of this project and forging a way forward. We believe we have enough evidence to get started on solutions. Further research will let us hone our recommendations and provide the complete evidence necessary to justify any new regulatory or legislative changes.”
PLSA deputy director of policy Joe Dabrowski says: “Without remedy there are expected to be 27 million small pots by 2030 – an outcome which would clearly not be in members best financial interests, or support effective engagement. It is a complex problem but one that must be solved, and the sooner we can do so the better.
“The Co-ordination Group has made great strides in identifying the practical challenges that need to be overcome and we’re incredibly pleased by concerted effort across the industry, and ongoing support from DWP and regulators to find and enact solutions, including legislative fixes that can be applied across the sector.”
The People’s Pension director of policy at B&CE Phil Brown says: “We welcome the PLSA’s much needed report on small pots as it’s an important milestone in solving one of the biggest problems faced by the industry. Much of the problem is concentrated in the automatic enrolment market and it’s incumbent on auto-enrolment providers, as well as Government, to work towards a solution that works in the interests of savers.”
ABI head of retirement savings Rob Yuille says: “More must be done to help savers with multiple small pension pots to get the most out of their retirement savings. The report today outlines the work industry has undertaken over the last six months to identify ways to increase the consolidation of small pension pots and has shown that our sector can go further, exploring ways to build on our track record in improving transfers. This provides a good base for the next stage of the project which will include building the evidence base for future legislative changes to implement mass market automatic small pot consolidation.”
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey says: “This report lays bare the enormous task facing the industry with the number of small pots potentially escalating to 27m by 2035. Auto-enrolment has been an enormous success in terms of getting people into a workplace pension scheme but as people move jobs or opt out of schemes, we are seeing a proliferation of small pension pots being left behind. Small pots are at risk of being forgotten about, or else eroded by charges while the increasing complexity of administering these schemes does not result in good outcomes for either the industry or pension scheme members.
“In an ideal world we could get to a point where members are sufficiently engaged with their pensions and deal with the transfers themselves. Providers will continue to look at improving engagement but there is a need for some kind of automatic solution to reduce the number of small pots in existence and it is important the industry is bracing itself to deal with this. However, there are also bigger issues at play here and while automatic transfers will deal with the number of small pension pots in existence thought also needs to be given to how to solve the issue of small pots being created to begin with. That’s why we support the idea of adapting auto-enrolment to allow individuals to choose which provider their pension contributions get paid to.”
Smart Pension director of policy and market engagement Darren Philp says: “Auto enrolment has been a huge success, but one of the by-products has been the creation of hundreds of thousands of small pots that people lose track of and are costly to administer. This report is a welcome further step in the search for finding a solution, but it is clear that we will need legislation to be able to consolidate people’s pots and address the small pots issue in a safe, secure and efficient way. Industrialising, increasing efficiency and removing cost from the transfer process needs to be achieved as a prerequisite to any solution.
“The next phase of the work is now to look in depth at potential models, whether that be a form of pot follows member or other default consolidation. We need the group to continue to build a consensus and deliver recommendations that benefit pension savers.”
TISA COO Carol Knight says: “We are pleased to see that the findings from the DWP working group last week have been taken forward. This report is crucial to resolve the growing industry problem of small pots. TISA has long supported efforts to resolve the problem of small pension pots. We believe that, with full collaboration between the Government and the industry, a robust and effective framework can be created to facilitate the consolidation and transfer of small pots. This report is a great start, and we look forward to working closely with both industry members and the government to take the findings forward and develop regulatory and legislative solutions.”
Summary of the group’s conclusions:
Administrative issues
- Further understanding of the reliability of matches using existing data criteria and understanding how far a unique identifier can overcome some of the inefficiencies with existing data.
- Providers to work with employers and government to improve data quality, where they are able to, for example, government could help to verify data held by schemes. Particular focus should be placed on the need to provide sufficient data for effective member matching as part of employee set up.
- Update regulatory guidance to require trustees or scheme providers to keep personal contact details (including email) as already prescribed in the legislation. Expanding common data requirements to include holding saver mobile phone numbers might also be helpful.
- Consideration of the feasibility of a low-cost, at-scale transfer process for small pot consolidation initially between master trusts, and potentially with wider application.
- Consideration of other studies or pilots to consider the feasibility of a low-cost at-scale transfer process for small pots as appropriate.
- Co-ordination between the Small Pots Co-ordination Group and the Pensions Dashboards programme to explore opportunities and challenges of closer alignment; particularly learnings from data matching and data standards.
- Small pots data matching protocols align with those for Pensions Dashboards and should be considered as part of the ongoing work by PASA, PLSA and ABI on Pensions Dashboards Data Matching Conventions (DMCs), whilst recognising that the different context of small pots consolidation may require stricter criteria
- Ensure that the current phase of industry development supporting Pensions Dashboards, such as the design and build of ISP services, is informed and aware of the future matching requirements of Small Pots.
- A recommendation to focus resources on getting the Pensions Dashboards core eco-system set up and running, rather than diverting attention to Small Pots requirements, but with the caveat that the successful vendor should be kept abreast of developments on Small Pots so that this can be taken account of in decision making, but without delaying the pensions dashboards ecosystem development timeframes. Additionally, other vendors may be more suited to delivering small pots solutions.
Factors of assessment of future consolidation models
- Identifying preferred consolidation model(s) and key elements of the legislative and regulatory framework.
- Further consideration of the conditions for transferring small pots under an automatic small pots solution and the balance of potential detriment and benefits to savers, and delivering a low-cost process.
- Review and agree assumptions for a small pots ecosystem and develop high-level process maps for both “push” and “pull” models.
- Once further model design work is undertaken, the pots in scope should be modelled against them to assess the impact on savers and the automatic enrolment market.
- Request for TPR guidance to support transfers between charge capped default funds within authorised master trusts.
Implementation of future consolidation models
• Pots within scope of future automatic transfers should be:
– Small deferred pots within default funds and Sharia funds under qualifying schemes.
– A suitable trigger for identifying a deferred pot and when it can be transferred need to be considered against the different consolidation models and as part of the consumer journey research and labour market analysis.
• Agreed definition of a deferred small pot member within legislation.
- Automatic transfer opt-out embedded in existing customer communications e.g. new scheme documents.
- Exemptions for small pots automatic transfer process from existing requirements, i.e. COBS 13.1 and SMPI (Disclosure Regs 2013).
- Consideration of small pots carve out or other solutions in upcoming regulatory initiatives. Encouraging digital communication, making sure pension communications can be effectively sent and received by email and SMS i.e. by including personal email as a required item within automatic enrolment jobholder information.
- Implementation of a small pots solution should be staged, starting with what is possible within the current confines of existing legislation.