Automatic enrolment has been a huge success in increasing the number of employees saving in a workplace pension. However, private-sector employees usually get a new pension pot every time they move employer.

So by the time people reach retirement, they can end up with their pension savings scattered across several pots, some of which can be very small.

In 2023, there were an astonishing 12.1 million defined contribution (DC) pension pots worth under £1,000 that are no longer contributed to (deferred).

They contained over £4 billion in total. These numbers have been increasing rapidly and will continue to grow without policy action.

The proliferation of these deferred small pension pots is burdensome for both pension providers and savers. Fixed costs of administering a pot lead to higher charges, and lower returns, for savers.

Having savings spread over several small pension pots also makes it easier to lose track of their savings, and makes it harder for them to make sensible drawdown decisions in retirement.

This is especially a problem for lower earners and women who tend to accumulate more small pots. Our new illustrative modelling suggests that, over a nine-year period, over half of pots accumulated by women will be worth under £5,000, compared to one in three pots accumulated by men.

The status quo is not fit for purpose. The key question is then: how should policy respond?
There is a strong case for the automatic consolidation of deferred small pension pots, with the option for individuals to opt out if they wish.

This would reduce the stock of uneconomical pension pots, benefiting savers. It would also make it easier for individuals to manage their pensions. And it need not change the administrative burden on employers. This could be implemented through the creation of a central clearing house.

How should this automatic consolidation work? First, individuals who have more than one pot with the same pension provider should have all these pots automatically consolidated into the pot that represents the best value for money.

Besides same-scheme consolidation, a key question is which pot to consolidate deferred small pots into. The two most sensible choices would be either one of a set of government-approved consolidators (the ‘multiple default consolidator approach’) or a member’s current pot (the ‘pot follows member’ approach).

Either choice would be a significant improvement on the status quo.

Another important question is what size of pot to automatically consolidate – that is, how small is a small pot?

The case for consolidation is strongest for the smallest pots. It would be sensible to start by automatically consolidating the smallest deferred pots (e.g. under £1,000) to ensure the policy is working well before any larger pots are moved.

However, there would be merits to going further, and moving towards a system where people end up with just one, or a very small number, of DC pension pots as they approach retirement. This would help people make good decisions on using their pension savings in retirement.

This could be achieved by increasing the size limit for the consolidation of deferred pots. This would probably be more feasible under ‘pot follows member’ than under ‘multiple default consolidator’ due to potential anti-competitive effects of consolidating more and more pots into a small number of schemes.

Given the large, and growing, number of deferred small pots, and the challenges they pose for providers and savers, government action is needed. This issue has been around for more than a decade now, and it’s high time for the government to legislate for automatic consolidation.

---