The government must reconsider using a ‘pot follows member’ strategy as a solution to the growing number of small unclaimed pension pots, according to LCP head of defined contribution (DC) consulting, Laura Myers.

In response to a letter from the Work and Pensions Committee (WPC), Myers argued that the strategy was advantageous as it would not rely on member engagement, adding that consumer research showed the concept was simple, well understood and supported by the public.

However, she acknowledged that care would need to be taken around cases where an automatic transfer could happen from a lower cost scheme to a higher cost scheme.

In July, WPC chair, Stephen Timms, wrote an open letter to industry figures inviting them to come up with “workable solutions for consolidating very small pension pots”.

Myers’ response to this letter also contained analysis of other proposed solutions, warning that the idea of a single pension pot for life could drive up marketing and other costs for rival providers, as well as leaving members with lower incomes at a disadvantage.

Other solutions would need to be led by members actively consolidating their pots, though Myers warned savers were unlikely to bother chasing smaller pots and could end up making poor decisions by incurring charges or leaving schemes with valuable features.

Myers said: “There is no doubt that having tens of millions of small pension pots scattered around the pensions landscape is not sustainable. It is costly and inefficient and could undermine the drive to get members to engage with pensions.

“Ideally, members would consolidate their own pensions where appropriate, but in a system based largely around inertia it seems unlikely that relying on members to solve this problem for themselves will be effective.

“Just as automatic enrolment works by putting in place defaults which are right for most people most of the time, so solving the small pots problem needs to be based around automatic mechanisms, whilst preserving the right of a member to opt out.”

In July, the Pensions Policy Institute cautioned that the number of deferred pots could grow from eight million to 27 million by 2035 if the issue was not tackled by policy changes, noting that small pots were problematic for both members and providers.

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