The DWP has published the Small Pots Working Group report, which seeks solutions to the increasing number of small dormant defined contribution pots.
The Group identified several recommendations and actions for the industry and Government to work together on to tackle the issue.
Automatic enrolment has increased workplace pension participation but also increased the risk that the pension savings of lower earners and people who move jobs frequently become fragmented into a number of deferred, small pension pots.
The Pensions Policy Institute (PPI) estimates that, without intervention, the number of deferred pension pots in Master Trust schemes could increase from 8m to 27m by 2035.
The current average pot size within Master Trust schemes is estimated to be around £1,000.
The report recognises that initiatives such as pensions dashboards could facilitate more consolidation in the future.
While support for such member-initiated consultation should continue to be explored, the report commented that this alone is unlikely to stop the growth of small deferred pension pots. Action enabling automated low-cost transfers and consolidation should be prioritised.
Providers with multiple pots in charge-capped default funds for the same deferred member should look to consolidate these. Where this isn’t possible, providers should work towards implementing a single customer-facing view.
The report calls on the industry to establish operational-focused groups to investigate and address administrative challenges that will need to be overcome to underpin mass transfer and consolidation systems. It suggests that member-exchange proof-of-concept trials involving low value small pots within Master Trust schemes should be developed and prioritised, as they would offer an opportunity for learning through testing. A feasibility report could be produced in summer 2021.
The Group suggested two specific models of small pot consolidation for consideration: the default small pot consolidation scheme and the automatic ‘pot follows member’ solution. It recommended that the DWP and the pensions industry work together to develop an initial cost / benefit analysis in the second half of 2021 to assess the options further.