UK government greenlights small pot consolidation, Pensions Regulator promises new toolkit

The UK government is moving forward with plans that will see small pension pots belonging to workers automatically consolidated. UK pensions minister Torsten Bell said he has asked the Pensions and Lifetime Savings Association (PLSA) to lead a digital systems feasibility study.

“The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike,” explained Zoe Alexander, PLSA director of policy and advocacy.

The PLSA-led study was a key recommendation in the Small Pots Delivery Group (SPDG) report, published on April 24. If all goes to plan, consolidation of small pots would begin from 2030.

A key feature of the country’s pension auto-enrolment system for employees was that providers were chosen by employers. However, because people change jobs and move between different employer schemes, this has generated the current 13 million small pension pots. Consolidation will lead to savings as employees will pay a single management fee on a consolidated pot, rather than multiple charges across multiple small pension pots.

Bell believes consolidating small pots would add around £1,000 to the pension savings of an average worker.

Consolidators

The small pots feasibility study will build a specification and operating model for a data platform. To keep costs to a minimum, the SPDG recommended building on work already carried out to facilitate the pensions dashboard, including on tracing pensions.

The SPDG recommended that only pension providers already approved for auto-enrolment should be eligible to become consolidators. They should also have to demonstrate they offer savers value for money on a three-year rolling basis to retain consolidator status.

Where people have multiple small pots these would all be brought together with one provider from the approved consolidators. Where a pension saver has both a small pot and a larger pension under auto-enrolment, they would have the option to merge the small pot into their larger fund. People would also have the choice to opt out of having their small pots consolidated.

Clear guard-rails

Eight out of every 10 workers in the UK now saves into a pension under auto-enrolment, these pensions are overseen by The Pensions Regulator (TPR). Speaking at Pension Age Conference on April 24, Patrick Coyne, TPR interim director of policy and public affairs, said the regulator needed a different “toolkit” that enabled it to set guard-rails that allowed “ideas, products and services” to flourish.

Coyne added that as part of TPRʼs mission to support innovation in the interests of savers, it would launch an innovation hub in the summer.

“We define pension innovations as changes and improvements to pensions which enhance saver outcomes. We want our regulatory framework to help stimulate new ideas and support what’s already there, to provide certainty to businesses — schemes and administrators but also software and technology providers — that when they put money into research and development, they are not wasting their time,” he said.

He added that the hub would establish a clear process for testing, and bringing new products and ideas to market cost-efficiently.