The Department for Work and Pensions' Small Pots Working Group (the "Working Group") was set up in September 2020 by the Minister for Pensions and Financial Inclusion. The Working Group has recently published a report (the "Report") setting out its recommendations for tackling the growth of defined contribution ("DC") small, deferred pension pots in the Automatic Enrolment ("AE") workplace pensions market, with a particular focus on Master Trust schemes.
Background
Since its introduction in 2012, AE has resulted in a substantial increase in the number of workers saving into a workplace pension, with the majority of those saving into a DC scheme being enrolled into a master trust. Whilst this increase in workplace pensions is positive for savers, it has increased the risk of individuals having multiple deferred, small pension pots, particularly for those who change employment frequently.
The Pensions Policy Institute estimates that there are currently around 8 million deferred pension pots in the UK DC master trust market, with this number likely to rise to 27 million by 2035, without intervention. It is likely that many of these deferred pots will be small with the current average pot size within the UK DC master trust market being estimated at around £1,000, with a number of pots smaller than £100.
Small pension pot risks
There are several risks to scheme members with small pots, the key ones being pot erosion and lack of value for money, particularly where combination charging structures are in place. Additionally, there is a real risk of individuals losing track of workplace pension savings where those savings are spread across numerous small pots.
Pension providers may find that managing large numbers of small, deferred pension pots leads to increased costs as a result of inefficiencies, and these costs may in turn be passed onto scheme members.
Working Group Recommendations
The Report acknowledges that the number of small, deferred, DC pension pots is not in the interests of pension scheme members, pension providers or the taxpayer, and the recommendations in the Report focus predominantly on the consolidation of small pots.
The Report calls for the Pensions Industry, Government, and regulators to continue to explore and enable opportunities for member-initiated consolidation, with proportionate member safeguards. It is hoped that this, alongside the imminent introduction of Pensions Dashboards (discussed in our previous blog), will encourage more member-led consolidation in the future and will help to manage the risks associated with small pots.
Member-led consolidation alone, however, was not considered by the Working Group to be sufficient to tackle the growth in deferred, small pots. The Report suggests that pension providers should work towards consolidating small pots where they are being held in the same funds for the same deferred member and simplifying the way in which members can access their pension data, with information on their pension pots accessible in a single member portal.
Additionally, the Report recommends that the Pensions industry, working alongside the Government, should prioritise action on enabling automatic and automated large-scale, low cost transfers and consolidation for the AE mass-market. The report discusses several different mass transfer and consolidation options, including models such as 'member exchange' and 'automatic pot follows member'.
The "member exchange" model would involve trusted third party, pseudonymised data services conducting regular 'matching' exercises to identify deferred, small pots held by one pension provider which can be 'matched' with the active pot held by another provider. The pension provider would then inform the member and the deferred pot would be transferred over to the active provider. The 'automatic pot follows member' is a similar model, which would require pension providers to search for a new employee's deferred pension pots and automatically consolidate them into the employee's active pot. Both models would provide members with the opportunity to opt out of having their deferred pot transferred.
The Report suggests that operational focussed groups should be established to investigate the different models which could be utilised by the industry and the potential administrative challenges which are likely to be faced. Such investigations, alongside cost/ benefit analyses would allow for in-depth assessment of these models, with the aim of implementing appropriate models within the next 3-4 years.
We will continue to monitor any developments in response to the Working Group's report, along with other DC focussed developments within the pensions industry. If you would like to discuss anything raised in this blog, or any other aspect of your DC pension scheme, please get in touch with your usual contact at Brodies.
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