The Department for Work and Pensions (DWP) is preparing to launch a consultation on how to address the challenges posed by 13 million small pension pots. Scheduled for publication in September, the consultation will seek input from the pensions industry on the infrastructure needed to consolidate these small pots effectively.
The Labour government aims to establish a system that automatically combines deferred pension pots valued at £1,000 or less. Currently, there are around 13 million such small pots, with their number increasing by approximately one million annually. This situation presents difficulties for savers, who may incur multiple flat-rate charges, potentially reducing their overall returns.
For the pensions industry, managing these numerous small pots results in roughly £225 million in avoidable administrative expenses each year.
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A DWP spokesperson told Citywire, “We intend to consult on small pots policy in autumn, which will explore further consideration of the underpinning infrastructure required to support pension pot consolidation.”
Tim Gosling, Head of Policy at The People’s Pension, emphasised the importance of consolidation: “Small pots consolidation is essential, and the timeline in the DWP’s roadmap is realistic but challenging. The small pots feasibility study has shown that a federated model for the supporting IT infrastructure would be viable without the need for a central database. Current focus areas include the federated model’s specifics, governance, timing, and funding.”
He added, “The main challenge will be achieving this while the pensions sector simultaneously deals with the implementation of value for money (VFM) metrics, default pension schemes, and a 67% increase in the regulatory levy imposed on master trusts.”
Zoe Alexander, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association (PLSA), commented, “The accumulation of small pots imposes unnecessary costs and complexity on both savers and schemes. The PLSA has collaborated closely with industry stakeholders and the DWP to propose workable solutions and supports the government’s proposed model.”
She concluded, “We look forward to contributing to the delivery of the Small Pots Development Group’s recommendations and welcome the government’s action to address this long-standing issue within the upcoming Pension Schemes Bill.”