Automatic enrolment and frequent job switching have led to a surge in small, dormant pension pots, now a growing challenge for Government. In response, ministers have confirmed plans to move ahead with reforms aimed at consolidating the DC pensions market, with a clear ambition to create: “fewer, larger, better well-run schemes.”
The Scale of the Problem
- 13 million DC pots under £1,000, costing over £225 million annually to administer.
- These “forgotten” pots often suffer from high charges and reduced value for savers.
- In total, they represent over £4 billion in fragmented retirement savings.
The new Pension Schemes Bill, laid before Parliament last week, gives the Secretary of State powers to mandate the automatic transfer of small, dormant pots into a limited number of authorised consolidators, namely FCA-regulated schemes and master trusts, selected through a Government-run process.
Key timeline:
- 2027/28: Consultation on regulations
- 2029: Consolidator selection
- 2030: Transfers begin
A pot will be considered “dormant” if there have been no contributions or member activity for 12 months. Initially, only pots up to £1,000 will be in scope. However, the Bill allows this threshold to be increased (or decreased) in future relatively easily through an “affirmative procedure” rather than through the usual secondary legislation review process — providing the Government with potential further flexibility to expand the scope of consolidation across a DC market with over £1 trillion in assets under management.
Jacqui Reid, partner at Sackers commented: “Industry reception to these plans has, so far, been positive. But there are several as yet unanswered questions about how the consolidator model will operate in the interests of members.”
For example, the size of the small pots will be crucial in determining what impact small pots legislation will really have. Initially we know pots of up to £1,000 will be in scope for consolidation and will not “follow the member” as they move jobs, meaning members could still end up with a number of low value, fragmented pension pots just outside of scope (e.g. multiple pots of £1,250). So, the question is whether this is really the “game changer” the Chancellor is hoping for, or whether the pot size need will need to be increased over time.”
Jacqui Reid added: “Whilst we welcome the Government’s much needed focus on solving the small pots conundrum, reforms must strike the right balance between initiatives which increase value for members as well as creating further autonomy for Government when it comes to seeing pension policy in this space.”
