Addressing the challenge of deferred small pots

Following a Call for Evidence in February 2023 in which the Department of Work and Pensions (DWP) sought views on various options to consolidate small pension pots, it has now published a corresponding response paper. Therein, the DWP summarizes the feedback it has received to its initial Call for Evidence and launches a new consultation to explore a final regulatory framework to deal with „small pension pot issues“.
#### Background
Following the work of the so-called Small Pots Cross-Industry Co-ordination Group which sorted out viable options for the automated consolidation of small pots, the Department launched a Call for Evidence earlier this year in which it sought feedback and evidence on the alternatives presented by the Group and on different issues surrounding such consolidations. Specifically, two options were discussed: automated consolidation of small pots via
(1) the so-called „Pot follows Member (PfM)“ scheme which would transfer all existing savings resulting from automatic enrollment (AE) workplace pensions to future employers and their pension schemes and
(2) the deployment of so-called „Default Consolidators“ which would bring together and „consolidate“ existing savings into one pension scheme.
In this context, the DWP sought feedback on various issues, ranging from the current administration costs of small pots, to the number of small pots expected in the future (and current), to benefits and downsides of the deployment of default consolidators or the PfM scheme (please see EventID 19504 in this context for more detailed information on the issues raised by the DWP).
#### Summary of Feedback
Generally speaking, respondents confirmed the trend towards small pots due to increasing frequencies of changes in employment. Furthermore, they noted that particularly low-income employees and minorities tend to switch employment more often leading to a significant number of those small pots. In addition, most respondents found that a refund of micro pots is not a good option, as it is particularly small earners creating micro pots that already tend to struggle to accumulate retirement benefits.
As far as the limit for consolidation is concerned, many found the £1,000 threshold adequate. However, many respondents noted that this threshold is too low, leaving many still smaller pots above £1,000 and below £2,500 without consolidation. In view of the proposal to link consolidation of pots to the time of „inactivity“ in ANY pot („deferred pot“), most respondents found this to be a good solution. The time period most often suggested by commenters was six months. However, respondents also noted that consolidations based on an inactivity period can best be achieved via consolidators, the second option noted above.
Furthermore, respondents generally agreed on the benefits of this second option, noting improved quality control in consolidating pension pots, the potential for enhanced member engagement through consolidator relationships, and the reduced administration costs compared to the pot follows member model. Others, however, raised concerns about potential scam risks and concentration risks. In fact, particularly latter lead many respondents to fear reduced competition and innovation.
To conclude, as far as favoring one option over the other was concerned, the views were split. However, most respondents were clear that there should NOT be a „one consolidator“ approach, but rather a „multi-consolidator“ approach, if this option was to be chosen by the DWP.
#### New consultation
Based on the feedback provided, the DWP is considering to advance the option of introducing a „multi-consolidator“ approach. In this context, the DWP proposes, among others,
– to establish a „Central Clearing House“ which would „act as a central point informing schemes where to transfer a members eligible deferred pot“;
– to establish the process of communicating and transferring the pot to a consolidator (please see the document for more details);
– several options to assign small pots to a consolidator, if no such consolidator was chosen by a scheme member ahead of time;
– to establish an authorization regime for consolidators;
– to set out 12 months of inactivity as the criteria to define pots eligible for consolidation; and
– to set the threshold for small pot consolidation at £1,000 or less of accumulated benefits. There will be no minimum pot size for consolidation which implies that the payout of micro pots would not be implemented.
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Please note: these are only the key proposals in the new Call for Evidence. To view further details, please refer to the original document.