The small pension pots working group has published a report that outlines a series of recommendations for the government and pensions industry to work together on in tackling the increasing number of small, deferred pension pots in the auto-enrolment (AE) pensions market.

The cross-sector working group, chaired and facilitated by the Department for Work and Pensions (DWP), urged the government, industry and regulators to explore and enable opportunities for member-initiated consolidation, with proportionate member safeguards.

It conceded, however, that member-led consolidation alone was unlikely to halt the growth in defined contribution (DC) small, deferred pots, and recommended cooperation between the industry and government to enable automatic and automated large-scale low-cost transfers and consolidation.

Pension providers holding multiple pots within charge-capped default funds for the same deferred members were urged to work towards implementing a single consumer facing view, which the working group said could be achieved through adoption of industry best practice and regulatory guidance following scoping work in 2021/22.

To investigate and address administrative challenges that will need to be overcome to underpin mass transfer and consolidation systems that can be delivered at scale, the pensions industry was called upon to establish operational focused groups.

The working group noted that effective transparency and reporting arrangements will be required within the governance structure.

It stated that activity on scoping the core minimum viable administrative processes should be prioritised, including developing and testing data that would provide sufficient matching capability, developing and adopting common standards, and identifying requirements for a low-cost bulk transfer process.

An initial publicised update on the administrative challenges outlined should be made available in the summer of 2021, the working group added.

Additionally, the working group called on the industry to prioritise member-exchange proof of concept trials involving low value small pots within DC master trusts to test the concept, starting with a feasibility report in summer 2021.

It noted that the trials would offer an opportunity for learning through testing administrative processes for mass transfers and consolidation.

This investigation and examination of administration processes should then inform the development of the two consolidation system models: the default small pot consolidation scheme and the automatic pot follows member model.

The working group recommended that the DWP and pensions industry work collaboratively to develop an initial cost/benefit analysis in the second half of 2021 to further assess the models, including how they will complement pensions dashboards.

They were also urged to work together in developing customer journey mapping in relation to the models to understand the end-to-end process and provide deeper appreciation of the impacts.

Commenting on the report, Pensions Minister, Guy Opperman, said: “Given the risks that the growth of small pots presents to scheme members and their access to good quality pension provision, it is imperative that workable solutions are identified and successfully implemented.

“My ambition is that scheme members should be able to realise the best possible outcomes from their workplace pension savings.

“Consolidation of deferred small pots in the AE market is a key part of this – but it will take time to develop and implement effective solutions. The working group’s analysis and conclusions provides a framework to enable progress.

“Alongside working with the pensions industry, the government will consider the outcomes from the Work and Pensions Select Committee’s examination of the issues. We will also carefully examine international practices to understand approaches most likely to work within the UK landscape. Taken together, this will provide a stronger foundation for change over the medium term.”

Smart Pension director of policy, Darren Philp, added: "Small pots is an issue that needs solving and this report is an important milestone in understanding the issues and developing a roadmap for the way forward.

“We agree that we need to sort the administration issues concerning transfers and make the whole process more efficient and think technology has a vital role to play here.

“The report reignites the debate of consolidators versus pot follows member solutions to the small pots issue, but whatever solution is agreed upon, making transfers more cost effective is a prerequisite.”

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