Industry experts have raised concerns over the government’s plans to address small pots concerns, with a number of organisations encouraging the government to give further consideration to a 'pot follows member' solution.

The government recently launched a consultation on its proposed framework for a multiple default consolidator model that aims to address the large number of deferred small pension pots as part of the Mansion House reforms.

However, industry organisations expressed disappointment that the government chose not to pursue a pot follows member solution, with the Pensions and Administration Standards Association (Pasa) branding the move a "missed opportunity".

Equisoft products director, Nick Meredith, also argued that pot follows member could deliver a much clearer solution for consumers while avoiding the complexity and cost of centrally procured government infrastructure.

"We also feel that some of the issues cited as to why ‘pot follows member’ was not the right choice, are not adequately resolved by the DWP’s proposed solution," he continued.

"We agree with the overwhelming majority of the pensions industry that has shown almost universal support for the ‘pot follows member’ approach over the last decade and we were surprised by the decision and the reasoning behind the choice by the DWP of a consolidator model.

"The only supporters of the latter would appear to be those organisations who would look to be consolidators."

In particular, Meredith raised concerns over the fact that the default consolidator model relies on consumers being actively engaged, also sharing reservations over the proposed value limits, as engagement from already disengaged individuals is unlikely to happen until meaningful pot sizes are achieved.

Standard Life managing director for workplace, Gail Izat, echoed this, stating: “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. There is also the extra convenience with the “pot follows member” approach that the legislation already exists."

"It also risks further complicating the pensions system for savers due to the potentially cumbersome nature of the process and complex terminology," he stated. "This option requires the creation of a clearing house or central registry, the cost of which will be substantial and could outweigh the potential benefits of the solution."

Aegon head of pensions, Kate Smith, agreed, arguing that the proposed model is "fraught with complexity and cost", and that more consideration should be given to other solutions including pot follows member.

She explained: “A major barrier to any automated small pots solution is the total scheme cost of making pension transfers, which varies by scheme between £30 and £80, as indicated in the consultation paper.

"Until these costs are eliminated, and truly automated, with no human intervention, and communications fully digitalised, it’s hard to see any small pots solution being achievable or cost-effective.

"We urge the government and regulators to work with the pension industry to investigate ways to reduce transfer costs before forging ahead with any small pots solution."

Cost and time concerns were also raised by the Pensions Management Institute, which emphasised that the appointment of the default consolidators will need to be "carefully thought about and decided upon for a number of possible complaints which may arise.

Indeed, Izat warned, as the process for selecting consolidators is not yet clear, the proposed consolidator model could run the risk of distorting competition.

"If members are allocated to the first scheme they were automatically enrolled into, there is the risk of entrenching existing market positions," he stated.

"The process of selecting consolidators should be in the best interest of the saver. Existing market share should not be used as a basis, and a focus should be placed on the proposition that can offer the best outcome."

Despite the concerns, there has been some backing for the government's plans, as the PMI clarified that whilst it was a “keen advocate” of pot follows member, it recognises the direction of travel the government is looking to move towards and will help it to support members in this work.

Hymans Robertson head of master trust trustee consulting, Alison Leslie, also backed the government’s idea of default consolidators with a central clearing house, which will support the transfer of small pots to the appropriate place.

However, she agreed that a framework for authorisation is required to support this system and ensure members do not end up in poorer value for money arrangements.

“The detail of this framework is not clear at present,” she said. “In addition, a robust system of safeguards is required for providers to ensure that the rules and processes are clear and do not leave them open to challenge.

Finally, when you put this approach through the lens of DE&I, there will be a need for some form of filtering mechanism such that there are no detrimental unintended consequences on minority groups.”

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