Call for evidence focuses in on deferred small pots solutions

The Department for Work and Pensions (DWP) has launched a call for evidence in its efforts to address the challenge of deferred small pots in the auto-enrolment market, alongside a raft of broader defined contribution (DC) measures.

The call for evidence is looking to deepen the evidence base around the scale and characteristics of the growth in the number of deferred small pots, with recent industry research suggesting that the total value of lost pension pots had risen to £26.6bn in 2022.

The DWP's consultation is focussed on two large-scale automated consolidation solutions, a default consolidator model, where each small deferred pot would be automatically transferred to a single scheme, and pot follows member, where deferred pots follow the worker and are added to their new active pot.

However, the consultation also acknowledged the potential impact of other actions, including member exchange, and enabling more member engagement, that can help mitigate the growth in the number of small pots.

In particular, the DWP said that it wants to hear from those involved in the DWP-chaired Association of British Insurers (ABI) and Pensions and Lifetime Savings Association(PLSA) -led work on this issue, as well as those who can offer a member-perspective on the effectiveness of consolidation approaches.

The responses to the call for evidence and other stakeholder engagement are expected inform DWP’s development of its policy position on an approach, on which it will consult "in due course".

The DWP also recently hinted at plans to address the small pots problem in its response to the Work and Pensions Committee, stating that it would look to ensure that pots can be consolidated to provide better value for money and be more easily accessible.

Pensions Minister, Laura Trott, said that the latest call for evidence will look to "build on" the earlier work done in this area, including the work of the Small Pots Cross-Industry Co-ordination Group and efforts around pensions dashboards.

She stated: "We all recognise and rightly celebrate the success of automatic enrolment which has brought millions of workers into workplace pension saving, often for the first time.

"However, with this success has come a rapid growth in the number of deferred small pension pots; growth which is set to continue into the next decade. The growth of small pots means there is undue cost and inefficiency in the pension system.

"It creates a risk that deferred members lose track of their workplace pension savings – acting as a disincentive to member engagement. And it creates a cross subsidy risk for members with larger pots, which may impact their retirement outcomes.

"It is vital that we find the right large-scale solution to tackle this problem so that automatic consolidation of small pots becomes integral to the operation of the automatic enrolment market.

"We will assess the evidence to identify and develop an approach which puts the interests of members first by facilitating easy consolidation of deferred pensions, mindful that the approach needs to work for the whole of the automatic enrolment market.

"We will consider the shape and approach of legislation required, build a cost/benefit analysis, and consider the impact on the market of the potential solutions to inform our thinking.

"I am determined to drive the agenda forward to help ensure that a better functioning and more efficient pension market meets the needs of more engaged members."

Commenting on the consultation, PLSA head of DC, master trusts and lifetime saving, Alyshia Harrington-Clark, stated: “The government has rightly recognised that efforts need to be made to address the small pots issue, which is detrimental to savers, and causes market inefficiencies.

"If unaddressed this could lead to over 20 million small pots by the end of the decade. We are pleased to see many of the recommendations from the PLSA and ABI-convened Small Pots Co-Ordination Group – which comprised of a range of pension providers, industry, regulatory and consumer bodies and stakeholders – progressed today.

"Industry has and will continue to work hard to support government efforts to resolve to these complex problems for the future of consolidating small pots and implement mass market automatic enrolment solutions."

Adding to this, LCP partner, Steve Webb, stated: “Whilst it is welcome that the government is seeking to address the small pots issue, it is time for the DWP to get off the fence and take action.

"It has been obvious since the start of automatic enrolment that small pots would be an issue which is why the 2014 Pensions Act provided for a pot-follows-member solution.

"Unfortunately this was not seen through and, nearly a decade later, we are still at the stage of ‘calls for evidence’ followed by further consultation.

"What is needed is for someone to take a decision and move ahead with implementation."

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