The UK pensions industry, working with the government, should prioritise progress on administration processes to enable large-scale consolidation of deferred, small pension pots, a government-commissioned working group has said.

In a report published this week, the group said current evidence, including from international experience, suggested that automatic transfer and consolidation systems would be necessary to complement member-initiated transfers.

However, final decisions should be guided by reform of core administrative processes and systems so workable solutions could be developed, the working group said.

One of its recommendations is that member-exchange proof-of-concept trials involving low value small points within master trust schemes be developed and prioritised by the pensions industry, “starting with a feasibility report in summer 2021 after in-depth scoping work”.

The industry could learn from these trials, for example in relation to testing data-matching capability and processes, including the costs within the transfer system.

The working group subsequently stated there were two automatic transfer and consolidation models that should be prioritised for low value small pots: the default small pot consolidation scheme and the automatic pot-follows-member model.

Automatic enrolment has boosted workplace pension coverage but 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 has estimated that, without intervention, the number of deferred pension pots in master trusts could increase from 8 million to as much as 27 million by 2035, with many of these deferred pots likely to be small.

The risks with small pots include erosion of their value due to charges and savers losing track of them and their savings.

In a foreword to the small pots working group’s report, Guy Opperman, minister for pensions and financial inclusion, said those involved had produced “an impressive analysis of complex issues at pace, with a route to make headway”.

“This is [sic] significant step forward in finding workable solutions to tackle small pots, which I am going to study in detail with the Department [of Work and Pensions] in 2021.”

The Pensions and Lifetime Savings Association (PLSA) has its own small pots project, and Lizzy Holliday, its head of DC, master trusts and lifetime savings, welcomed the direction of travel and solutions indicated in the working group report.

“The PLSA are excited to continue working with our members next year on implementing the actions recommended in the roadmap as well as with the government and the wider industry on shaping key next steps,” she said.

“Crucial to these is the need for more developed cost benefit analysis – to consider the impacts on saver journeys and the shape of the pensions landscape of the various models that remain in play, prior to further government decisions.”

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