The Department for Work and Pensions (DWP), alongside the industry and The Pensions Regulator (TPR), should consider developing a framework for six default consolidators to operate under to help address the increasing number of small pension pots, Broadstone has said.

In its response to the DWP’s consultation on small pots, Broadstone stated that it believed the consolidation model would be best to achieve a simple solution to the small pots issues.

It added that this option would require a low level of engagement from savers and create the highest chance of good outcomes, while avoiding unintended tax consequences and placing a low burden on pension scheme sponsors.

The framework would need to have value for money (VFM) and quality pension provision at its core, Broadstone noted, alongside a low level of due diligence once pots and destinations were identified.

“With billions of pounds accumulated in small pots, a transparent and simple solution could provide a boost to many people’s retirement incomes,” commented Broadstone head of policy, David Brooks.

“An effective consolidation model would be low maintenance for both members and sponsors, ensuring VFM.

“It would leverage the anticipated success of the pensions dashboard in connecting members with their pension pots and engaging more people with their later-life savings.”

While Broadstone stated that it did not believe that a ‘pot follows member’ approach should be pursued, other industry figures disagreed.

Standard Life head of workplace proposition, Neil Hugh, said that the firm would like to see the introduction of a pot follows member approach, whereby pensions under a certain size automatically transfer when people change jobs.

“If implemented efficiently, this will have the advantages of not requiring any action from the member,” he argued.

“It is also an easy concept for consumers to understand compared to other more complex approaches. In a charge cap environment, concerns about the VFM offered by receiving schemes are greatly lessened.”

This view was shared by NPT Master Trust head, Paul Armitage, who said the scheme favoured the pot follows member approach as it was the option that could best deliver for members without unduly distorting the market.

“Since members are more likely to have a connection with their active scheme, it makes sense to consolidate where people are actively saving,” he continued.

“In terms of the level below which automatic transfers take place, it needs to be set at a meaningful level so it makes a difference, but not so high that it unduly impacts business models.

“We think £2,500 is a good starting point and can be kept under review, but we would also have a separate refund solution for micro pots below £100.”

Also responding to the consultation, The Investing and Saving Alliance head of retirement, Renny Biggins, said that issues around pension saving in the wider context need to be addressed to reduce the problems caused by the proliferation of small, deferred pots.

“The over-arching issue is consumer engagement,” he noted. “Consumers are not taking an active involvement in the accumulation phase, are losing track of older pension entitlements and are not equipped with the knowledge to make informed decisions when finally being faced with them at retirement.

“These factors are ultimately leading to poorer retirement outcomes. A fully automated solution which largely removes the stock and ongoing flow of small pots but does nothing to promote engagement and understanding in DC pensions is a missed engagement opportunity

“Simplicity and lowering costs must be a fundamental principle in small pot considerations and consumers need to understand any changes that are made to the transfer process for small pots. To reduce cost, we strongly believe that the adoption of open transfer standards is also necessary.”

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