11 July 2023
If you are covering the DWP’s consultation, ‘Ending the proliferation of deferred small pension pots’, please see the following comment from Jon Greer, head of retirement policy at Quilter:
"Our working habits have drastically changed over the last few decades. Previously people might have had one or two jobs during their lifetime and as such one or two pensions attached to them. Now people are moving to multiple employers over the course of their working life and as a result of auto-enrolment are also building up multiple pensions sometimes with not that much in, also known as "small pots". This unintended consequence can make retirement saving even more complicated and may actually cost savers money. The government are therefore understandably wanting to ensure the market is working best for savers in this regard and are laying the groundwork for a shake up to auto-enrolment and put savers at the heart of the policy.
"A big issue for pension providers is dealing with small pots, especially those less than £1,000 as they can actually lose money for providers because of administrative costs. On average, it costs about £20 annually to administer a deferred pension pot, according to the Pensions Charges Survey. For a pot of £350, if a provider is only recouping £1.40 per year through a 0.4% Annual Management Charge (AMC), this can quickly turn into a loss.
"If you have multiple small pots, you could be paying unnecessary administrative costs. On top of that, some providers may offset their losses by charging higher fees on larger pension pots, meaning you could be cross-subsidising the costs associated with managing smaller pots. Consolidating your small pots not only can save money but simplifies your retirement planning. It reduces the administrative burden of managing multiple pots and, more importantly, minimises the chance of lost pension pots. Its estimated that in 2022 the value of lost pots had reached £26.6 billion, which could have been avoided.
"For these reasons the three main options being considered for managing small pot consolidation are ‘pot follows member’, ‘single default consolidator’ and ‘multiple default consolidator’.
- Pot follows member: This option means your pot moves with you from job to job. It's slower and requires more transfers, which might mean higher costs, but it keeps your pot linked to your current employment. Businesses may also be reticent to approve this as it could put additional administration burden on them.
- Single default consolidator: This is where all small pots are transferred to a single entity. It could potentially lead to substantial cost initially, but it could provide benefits such as economies of scale and simpler administration in the long run.
- Multiple default consolidator: This option involves dividing small pots amongst multiple consolidators. This might mean less administrative burden as many providers already hold a high concentration of small pots.
"Any move to any of these proposals would represent a significant alteration in the workplace retirement saving arena having long lasting impacts on people’s retirements savings. Therefore, the results of this consultation could pave the way for seismic change."
