With the recent news that the DWP’s is planning to bring together small pension pots, industry experts and professionals have shared their views:
Jon Greer, head of retirement policy at Quilter, comments: “The government’s move to prompt consolidation of small workplace pension pots is a much needed tidying up exercise, coming 13 years after the start of pensions auto enrolment. As working habits have evolved, people frequently change jobs, leaving behind a trail of small pension pots. This unintended consequence can make retirement saving complicated and may cost savers money.
The government is understandably keen to ensure the market works best for savers, shaking up workplace pensions to make them more efficient. They have chosen a ‘multiple default consolidator’ model, which involves dividing small pots among multiple consolidators. This approach could reduce the administrative burden, as many providers already manage a high concentration of small pots.
For pension providers, dealing with small pots, especially those with less than £1,000, is inefficient and can result in financial losses due to administrative costs. On average, it costs about £20 annually to administer a deferred pension pot. For a pot of £350, if a provider only recoups £1.40 per year through a 0.4% Annual Management Charge (AMC), this can quickly turn into a loss.
If you have multiple small pots, you could be paying unnecessary administrative costs. Additionally, some providers may offset their losses by charging higher fees on larger pension pots, meaning you could be cross-subsidising the costs associated with managing smaller pots. Consolidating your small pots can save money and simplify your retirement planning. It reduces the administrative burden of managing multiple pots and minimises the chance of lost pension pots.
This initiative is set to boost retirement savings for the average worker by around £1,000 and save businesses £225 million a year in unnecessary admin costs. It will cut costs for savers, make it easier to keep track of pensions, and boost living standards, making working people better off. This reform is a significant step towards ensuring that workplace pensions work harder for savers.”
Kate Smith, Head of Pensions at Aegon, comments on the ‘Small Pots Delivery Group Report’ published today:
“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. The Small Pots Delivery Report, published today, 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 consolidator.”
Gail Izat, Managing Director for Workplace and Retail Intermediary at Standard Life, part of Phoenix Group said: “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. The introduction of consolidators that can administer these pots effectively and invest them dynamically will be a step forward and when combined with pension dashboards will empower people to take control of their savings. We look forward to working with government on the creation of this new system and to working through the role of consolidators and what it entails.”
Commenting on today’s Small Pot Delivery Group report, Jonathan Hawkins, Propositions Lead, EMEA, Bravura, said:
“Today’s report from DWP marks an important step towards modernising the UK’s outdated pensions infrastructure and simplifying pensions management for millions of savers. As retirement patterns continue to change, the efficient management of smaller pension pots will have huge implications for UK citizens, particularly for those with more transient jobs or careers. On behalf of Bravura, I was delighted to be able to put our views forward as part of the expert panel that ultimately fed into today’s report.
Whilst expected Small Pots changes will enable some providers to gain commercially from more efficient management, it is also likely to expose those operating on legacy technology who will face significant challenges in managing this transition. The importance of embracing open infrastructure capable of automating the full lifecycle from onboarding to consolidation and ultimately drawdown, cannot be underestimated. Failing to do so means providers running legacy tech will struggle to effectively automate these new processes, especially when dealing with incomplete or imperfect information. This is particularly critical given the scale of the task.
With the long-awaited Pensions Schemes Bill coming later this year, it will be interesting to see whether, over time, we continue to move towards a model to give savers the right to choose their workplace provider – something we know from experience in Australia leads to greater competition and higher standards across the board. If we can improve accessibility and streamline the pensions process via technology, we can start to challenge the current inertia many feel towards their pension and begin to create better outcomes. The Small Pots Delivery Group report is an important step towards this.
Our recent research (Pensions 2045) highlighted the struggles UK pension holders face when it comes to the use of technology and digital tools for retirement planning. The streamlining of small pot proliferation will go some way to addressing these concerns.”
David Brooks, Head of Policy at Broadstone, commented: “The DWP’s paper data on its Small Pots Delivery Group highlights the urgency of tackling this issue with the number of deferred pots across five large providers growing rapidly over the past few years from 8.3 million to 11.2 million. Consolidating small pots will make it simpler for savers to manage their pensions, especially in tandem with the Pensions Dashboard due to come on stream later this decade.”
