Addressing the challenge of deferred small pots

In an effort to increase efficiency in the administration and management of deferred small retirement pots (small pots) and to increase the awareness of pension scheme members about their different retirement (investment) pools and possible consolidation alternatives, the Department of Work and Pensions has launched a call for evidence on this matter.
Specifically, following the work of the Small Pots Cross-Industry Co-ordination Group which has sorted out viable options for the automated consolidation of small pots, the Department seeks feedback and evidence on the alternatives and on different issues surrounding such consolidations. As small pots are increasing in numbers simply due to the fact that typically UK workers are changing their employers more often, such consolidation is deemed to be necessary to increase the efficiency in pension schemes and lower the overall cost incurred by scheme administrators and – ultimately – by scheme members.
In a first step now, the DWP presents the two viable options noted above, namely the automated consolidation of small pots via
(1) the so-called „Pot follows Member (PfM)“ scheme which would transfer all existing savings resulting from automatic enrolment (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.
Regardless of which option is chosen, it shall bring about the following benefits for scheme administrators and members:
– deliver benefits for savers by increasing value for money for them;
– accompany savers throughout their employment history;
– enable savers to understand the flow of their payments and savings;
– minimize the complexity and administrative burdens for employers; and
– bring about trust in the UK pension system.
In this context, the DWP is now seeking evidence and feedback on various issues surrounding the consolidation of deferred small retirement pots, including the following, among others:
– the expectations as regards the future development of the number of small pots;
– steps that the DWP may take to increase member initiated transfers;
– the average cost of transfer from one pension scheme to another;
– the current costs for administering a small pot;
– the benefits and downsides of the deployment of default consolidators or the PfM scheme;
– possible impacts on the investment strategy of pension schemes from an automated small pot transfer (if at all); or
– other solutions that the DWP shall consider to consolidate small pots.
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As the number of questions raised by the DWP is quite large, please refer to the original consultation document for a detailed list of issues. Please also note that the consultation is high level in nature, meaning that no specific regulations or rule amendments are proposed. At this point, the DWP simply seeks to sort out which option appears to be favorable considering the feedback from employers, scheme members, pension schemes, and their administrators and managers.