The government has announced the creation of a small pensions pot consolidator, in reforms unveiled by the pensions minister today.
The new initiative will tackle the growing problem of small, forgotten pension pots that many people accumulate as they move between employers over their working lives. There are now 13 million of these small pots, holding £1,000 or less, with the number increasing by around one million a year.
This is a hassle for savers and can stop them getting a good return on their savings if they have to pay multiple flat rate charges. Overseeing all these small pots also costs the pensions industry around £225 million in unnecessary admin costs.
Under reforms introduced by the government as part of the Pension Schemes Bill, 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.
The government will now work on creating a Small Pots Data Platform to identify and source the pension pots that could be consolidated.
It will also introduce a framework setting out the rules a scheme would need to follow to become a consolidator scheme. These would include 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.
Minister for Pensions, Torsten Bell, said: "It’s great news that more people are saving for their retirement. But I want to make pension saving as simple and rewarding as possible.
"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.
"We will automatically bring together people’s small pots into one high performing pension, reducing costs as well as hassle for savers. In time this could boost the pension of an average earner by around £1,000 as part of our Plan for Change to put more money in people’s pockets."
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association, commented: "The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike. The PLSA has worked extensively with industry and the DWP to propose solutions and supports the model being proposed by the Government.
"We look forward to working on delivering the recommendations of the Small Pots Development Group and are pleased the Government is tackling this long-standing issue in the Pension Schemes Bill."
Jon Greer, head of retirement policy at Quilter, added: “The government's move to prompt consolidation of small workplace pension pots is a much needed tidying up exercise, coming 13 years after the start of pensions auto enrolment. As working habits have evolved, people frequently change jobs, leaving behind a trail of small pension pots. This unintended consequence can make retirement saving complicated and may cost savers money.
“The government is understandably keen to ensure the market works best for savers, shaking up workplace pensions to make them more efficient. They have chosen a 'multiple default consolidator' model, which involves dividing small pots among multiple consolidators. This approach could reduce the administrative burden, as many providers already manage a high concentration of small pots.
“For pension providers, dealing with small pots, especially those with less than £1,000, is inefficient and can result in financial losses due to administrative costs. On average, it costs about £20 annually to administer a deferred pension pot. For a pot of £350, if a provider only recoups £1.40 per year through a 0.4% Annual Management Charge (AMC), this can quickly turn into a loss.
“If you have multiple small pots, you could be paying unnecessary administrative costs. Additionally, some providers may offset their losses by charging higher fees on larger pension pots, meaning you could be cross-subsidising the costs associated with managing smaller pots. Consolidating your small pots can save money and simplify your retirement planning. It reduces the administrative burden of managing multiple pots and minimises the chance of lost pension pots.
“This initiative is set to boost retirement savings for the average worker by around £1,000 and save businesses £225 million a year in unnecessary admin costs. It will cut costs for savers, make it easier to keep track of pensions, and boost living standards, making working people better off. This reform is a significant step towards ensuring that workplace pensions work harder for savers.”
