Small pension pots under £1k to be consolidated

The introduction of auto enrolment pensions has resulted in millions of tiny pension pots worth less than £1,000, leaving savers struggling to keep track. Sara White, Editor, Business & Accountancy Daily

To tackle this proliferation, the government plans to change the law to allow small pension pots to be combined into a single pension scheme to make it easier for people to track their pension savings and generate better returns.

There are now 13 million of these small pots, holding £1,000 or less, with the number increasing by around one million a year.

The move is set to increase retirement savings for the average worker by around £1,000 and save pension providers £225m a year in admin costs, but there is no date set for the scheme to go live.

The legislation will be part of the Pension Schemes Bill currently going through parliament. Under the proposals, each individual’s small pots will be brought together into one pension scheme that is certified as delivering good value to savers. Individuals will retain the right to opt out.

Gaucho Rasmussen, executive director of regulatory compliance at The Pensions Regulator, said: ‘Having lots of small pension pots erodes value and makes retirement decision-making difficult. We welcome steps to solve the problem.’ 

The government said ‘the initiative will tackle the growing problem of small, forgotten pension pots that many people accumulate as they move between employers over their working lives’.

Minister for pensions Torsten Bell said: ‘As people change jobs they are enrolled into a new pension, often into a new pot - resulting in more and more small pots being created and making it harder to keep track of pension savings.

‘There are now more small pension pots in the UK than pensioners – raising costs and hassle for workers trying to track their savings. It also costs the pensions industry hundreds of millions of pounds every year.

‘In the coming months, I will say more about our expectations in terms of sequencing and timing as I am aware of the amount of reform and the need to make it work.’

The proposals follow the recommendations of the Small Pots Delivery Group, which called for the creation of a small pots data platform to identify and source the pension pots that could be consolidated. It will act as a central hub to undertake data matching and identity verification on behalf of pension schemes.

There will be a framework setting out the rules a scheme would need to follow to become a consolidator scheme, including already being in an automatic enrolment qualifying scheme, having a specified level of scale to manage expansion, providing good value for money for their members and providing additional protection for members from flat fee charges.

The small pots consolidation programme will work outside of the plans for a pensions dashboard, as ‘relying solely on member-led consolidation is not expected to significantly change the dial on the small pots problem’. It is expected that the scheme will be a discrete development, not dependent on the timing for the launch of proposed pensions dashboard.

However, some commentators have questioned the value of creating another system outside of the long trailed pensions dashboards and creation of pension ‘megafunds’.

Rachel Vahey, head of public policy at AJ Bell, said: ‘We should be asking if an automatic consolidator is really needed and, given these other plans, whether this is the best use of government and pension provider – and ultimately pension saver – money.

‘Instead, we need an overall strategy and clearer view on the sequencing of government plans – how they fit together and what they mean for workplace pension savers. Bell has promised this; let’s hope he delivers it soon.

‘It’s important to note this only applies to pensions used for automatic enrolment, which, broadly speaking, means most private sector workplace pensions set up since 2013.

‘That means those with older pension arrangements are outside the scope of the exercise and should still be thinking about whether they wish to take steps to consolidate their pension pots themselves.’