The UK government’s plans to automatically consolidate millions of deferred small pension pots will create a major operational challenge for the pensions industry, consultants and technology providers have warned.
The Department for Work and Pensions’ consultation on its proposed delivery model for the Multiple Default Consolidator solution closed yesterday, setting out the framework for consolidating deferred pots worth less than £1,000 (€1170).
There are currently more than 13m such pots, with a combined value of more than £4bn. Around 1m additional small pots are being created each year, while administration costs across the industry are estimated at £240m annually, ultimately borne by savers.
David Pye, head of client development at Broadstone, said automatic consolidation could simplify pensions for savers while reducing administration and costs, but stressed that the practical challenges should not be underestimated.
“The small pots problem has been building for years and the scale of the challenge is becoming increasingly difficult to ignore,” Pye said. “With more than 13m deferred pots with a total value of over £4bn already in the system and another million being created every year, automatic consolidation has the potential to make pensions simpler for savers while stripping out a significant amount of unnecessary administration and cost.”
The consultation follows the passing of the Pension Schemes Act 2026 and covers issues including eligibility criteria for schemes and pots, authorisation requirements for consolidators and new duties for employers to provide relevant information about enrolled employees.
Pye said the focus should be on member outcomes rather than simply transferring assets into larger schemes.
“The small pots problem has been building for years and the scale of the challenge is becoming increasingly difficult to ignore”
David Pye, Broadstone
“The government is right to put member outcomes at the centre of the framework,” he added. “Consolidation should not simply be about moving assets into bigger schemes, but ensuring savers are transferred into well-governed arrangements that offer good value for money and lay the groundwork for achieving improve retirement outcomes.”
The government has proposed a federated delivery model, underpinned by a central oversight body, rather than a fully centralised system. Under the proposed model, schemes would continue to exchange data, conduct matching activity and undertake transfers through scheme-led processes within common rules, standards and governance.
Maurice Titley, commercial director for data and dashboards at Lumera, said the model could provide a scalable approach, but highlighted the infrastructure needed to make it work.
“When Lumera co-authored the 2025 Pensions UK Small Pots Digital Systems Feasibility Review with KGC, one of our key conclusions was that a federated model could be delivered, provided the industry established common approaches to areas including data standards, messaging standards and data matching.”
Titley said the consultation could help develop those approaches and clarify the role of the proposed central oversight body.
“The government has reiterated its ambition ‘to have small pot consolidation operational from 2030’ and this consultation already gives enough direction for industry to start preparing to deliver this.”
He added that schemes and consolidators would need systems and processes capable of handling high volumes of automated matching and transfers.
The need to address the experience of deferred members was also highlighted by Hymans Robertson.
Hannah English, head of defined contribution corporate consulting at Hymans Robertson, said changing labour-market patterns had contributed to the growth in multiple pension pots and argued that pensions adequacy should encompass former as well as current employees.
“As the labour market has significantly changed in the last decade, so too should pensions,” English said. ”Individuals move jobs on a more frequent basis, with likely multiple employers in their lifetime and corresponding pots.”
The consultation also needs to resolve issues including data matching, member communications and the treatment of pots carrying valuable guarantees or protections, Pye added.
“The industry will also need sufficient certainty and time to build the infrastructure required to make millions of transfers accurately and securely.”
Pye said: “2030 may sound some way off, but creating a system capable of consolidating potentially tens of millions of pots will be a major operational undertaking.”
