Kate Smith, Head of Pensions at Aegon UK, and Steve Webb, partner at LCP have commented on the UK Government’s response to its call for evidence ‘Addressing the challenge of deferred small pots’ and further consultation on the proposal to resolve the small pots issue.
She said: “The rapidly expanding number of small frozen pension pots is a result of the success of auto-enrolment and the lack of engagement by savers with their pensions. The reality is that many of those with small frozen pension pots are low earners and are likely to be the least engaged with their pension savings. This means that any solution needs to be built around the auto-enrolment principles of inertia, or ‘going with the flow’ and focused on supporting those small pot savers’ needs.
“The government’s preferred approach is to use multiple consolidators under a new regulatory framework for both existing and new deferred pension pots. Here the member would be given the option to choose their designated consolidator and will have the choice to opt-out of the automated process and leave their pot with their existing employer’s scheme. Designed using the principles of auto-enrolment, but member engagement will be needed.
“The Government sees attractions in bringing together thousands or millions of small pots into one or more large consolidators. These could be existing schemes such as master trusts, or potentially FCA regulated contract-based schemes. It’s fundamentally important that automated consolidators have the highest level of value for members, and that only authorised schemes are allowed to act as automated consolidators under this process. This will protect members from being automatically transferred into poor value high-cost schemes leading to poorer member outcomes.
“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 valued around £4billion. We believe this strikes the right balance between enabling sufficient consolidation without distorting the pensions market by removing efficient pots and improving member outcomes.
“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 focussed 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.”
Commenting on the news regarding small pots, Steve Webb, partner at LCP 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, whilst 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”
