UK’s Department for Work & Pensions unveils small pots consolidator

Millions of small pension pots in the UK are due to be consolidated into an individual’s one pension fund as part of reforms unveiled by the pensions minister today.

The new initiative aims to tackle the growing problem of small, forgotten pension pots that many people accumulate as they move between employers over their working lives. The Department for Work & Pensions (DWP) estimates that there are 13 million of these small pots, holding £1,000 or less, with the number increasing by around one million a year.

Overseeing these small pots, according to DWP, costs the pensions industry around £225m (€263m) in unnecessary admin costs.

Under reforms introduced by the government as part of the Pension Schemes Bill, each individual’s small pot will be brought together into one pension fund that is certified as delivering good value to savers.

However, individuals will retain the right to opt out.

According to DWP, this will cut costs for savers and make it easier to keep track of their pensions while boosting living standards and making working people better off. It will also cut red tape for businesses managing the pension schemes and unlock economic growth as part of the government’s Plan for Change.

The announcement follows the work of the Small Pots Delivery Group. Their findings, aimed at supporting the design and implementation of the new small pots consolidator scheme, include:

• a Small Pots Data Platform to identify and source the pension pots that could be consolidated;
• a framework setting out the rules a pension fund would need to follow to become a consolidator scheme. These would include already being in an automatic enrolment qualifying scheme;
• safeguards for savers whose pension pots would be consolidated, which include a member opt-out option.

The bill is set to be introduced in Parliament later this Spring.

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.”

However, he said there are now more small pension pots in the UK than pensioners, which he said is “raising costs and hassle for workers trying to track their savings”.

He said: “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 (PLSA), agreed that small pots create “unnecessary cost and complexity for savers and schemes alike”.

She said: “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.”

Gail Izat, managing director for workplace and retail intermediary at Standard Life, said the introduction of consolidators that can administer these pots effectively and invest them dynamically will be a step forward. When combined with pension dashboards, they will empower people to take control of their savings.

She said: “We look forward to working with the government on the creation of this new system and to working through the role of consolidators and what it entails.”

Gaucho Rasmussen, executive director of regulatory compliance at The Pensions Regulator, said, ” Having many small pension pots erodes value and makes retirement decision-making difficult.

“We welcome steps to solve the problem and will support government and industry to make these plans a reality.”

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