The Department for Work and Pensions (DWP) has outlined its proposed framework for a multiple default consolidator model that aims to address the large number of deferred small pension pots.

It published its response to the call for evidence on solutions to the small pots issue, and a new consultation to gather views and evidence on the proposed automated consolidation solution.

The proposed framework would enable a small number of authorised schemes to act as consolidators for deferred small pots and the government will look to take forward primary legislation to implement a statutory framework “as parliamentary time allows”.

Further detail underpinning the framework will be covered in secondary legislation and subject to another consultation.

Pensions Minister, Laura Trott, added that she will look to form a delivery group with the pensions industry to build on the model of the existing working group, which will aim to tackle outstanding design questions and ultimately implement an automated default consolidator system.

The DWP’s previous call for evidence found that there was no collective agreement on whether a default consolidator model or pot follows member approach would be the best solution.

It noted that while the pot follows member approach may be simpler for members to understand, the risk that a member could move from a well-performing scheme to a poor-performing scheme would risk putting the member in detriment, although this risk was expected to reduce over time due to the proposed value for money framework.

Furthermore, concerns were raised that, due to the frequency of transfers likely required under a pot follows member approach, schemes would need to become more liquid, which would work counter to the government’s productive finance focus.

On the other hand, the default consolidator approach could align more effectively with the DWP’s desire for a more consolidated pensions market, the consultation stated.

Additionally, the DWP believed the proposals for an enhanced authorisation criteria for schemes to act as a default consolidator could ensure there was less risk of detriment to members’ deferred pots that were transferred to a consolidator.

“These small number of consolidators will be able to generate scale at a greater rate, opening opportunities to invest in productive finance benefitting the wider economy,” the DWP said.

It therefore concluded that the multiple default consolidator model would be the optimum approach.

The DWP added that a more fundamental change to the auto-enrolment framework may be needed to stop the creation of new deferred small pots, including a simpler system of ‘stapling’, whereby a member’s active pension pot is assigned as their pot for life.

The consultation sets out the core framework for a multiple consolidator approach and seeks views on whether respondents agree with the proposals.

It proposed that a central clearing house should be created to act as a central point, informing schemes where to transfer a member’s eligible deferred pot and that a pot would be eligible for automatic consolidation 12 months after the last contribution was made.

The pot size limit was proposed to initially be set at £1,000, with regular reviews, and the consultation asked which of the options it set out would be the best approach to allocate a member a default consolidator in cases where a member does not make an active decision.

Commenting on the consultation, LCP partner, Steve Webb, said: “One of the side-effects of automatic enrolment has been the creation of millions of small, ‘deferred’ pension pots scattered across the pensions landscape. It is therefore welcome that the Pensions Minister has reached a decision on a way forward after a decade of debate.

“However, whilst consolidation of the very smallest pots into a small number of consolidator vehicles represents a step forward, many people will still find themselves reaching retirement with multiple pension pots.

“Even someone earning just £20,000 per year and making minimum automatic enrolment contributions will build up a pot above the £1,000 limit for consolidation. Once the new system is up and running, further thought will be needed to help ensure that savers can get best value from their DC savings.”

Standard Life managing director for workplace, Gail Izat, added: “We welcome the government’s renewed commitment to make progress on the issue of small pots. With the average person working more than 10 jobs in their lifetime, a side-effect of auto-enrolment has been the exponential growth of deferred small pots which is not in line with our ambition to engage people in better financial futures.

"The government has chosen to proceed with the consolidation option, in which any small deferred pots will be transferred to a pre-determined consolidation destination. We have some reservations with this approach as it currently stands, as it could run the risk of distorting competition. However, we’re looking forward to analysing the proposal in detail and working with the government and industry peers to make it a success for members.

“Our first preference would have been for a ‘pot follows member’, whereby pensions under a certain size automatically transfer when people change jobs. It’s an easy concept for consumers to understand and, in a charge cap environment, concerns about the value for money offered by receiving schemes are lessened.”

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