Government must act now to stop small pots problem undermining auto enrolment success

PPI research released today, sponsored by NOW: Pensions, estimates that there will be up to 27 million deferred pots in master trusts by 2035. Without government-led intervention, the market will become unsustainable in the long term. This would significantly damage the success of auto-enrolment.

There are already 10 million small deferred pots, costing £130 million a year in administration. With 27 million small pots in 15 years the bill for servicing these pots will be £1/2 a billion a year. The report explains that, today, every active member in an auto enrolment pension is supporting one inactive member. But by 2035 the PPI research shows that every active member will be supporting more than three inactive members.

There are a number of policy options available to the Government to address the issue of small pots. There is no simple solution. Each potential policy initiative has its pros and cons from the perspective of members, providers and the government. These include: Pot Follows Member, Member Exchange, Default Consolidator, Carousel Consolidator, Dashboard.

NOW: Pensions is calling for a Small Pots Taskforce, formulated from government, regulator, industry and consumer groups. The high-profile taskforce should be formed by the end of the year and deliver a proposed solution by the end of 2021.

Adrian Boulding, Director of Policy at NOW: Pensions said: ‘The PPI work has revealed no single magic bullet will provide an immediate fix for problem of small pots. There are merits and drawbacks to all the solutions on the table.

Until the issue of small pots is resolved, the cost of small pots must be paid for in some form. We welcome the Government’s recognition that a complete ban on flat fees could eliminate competition in the market and force up fees for savers. To pull the funding of small pots by changing the charging structure will destabilise the market’.

Joanne Segars, Chair of Trustees for NOW: Pensions said: ‘Master trusts, set up to serve this new market, are doing a good job and have brought millions of people into saving, many for the first time. The number of deferred members has grown rapidly, in part due to the high labour turnover in the auto enrolment population – when people change jobs, they often leave a small pension pot behind.

‘The proliferation of small pots is not good for members: they cannot benefit from economies of scale; easily lose track of their deferred pensions; and face multiple charges on each pot – for administration, benefit statements and levy charges, for example. This all eats away at their final pension pot.

‘The solution has to be to help members join up their pension pots. This needs careful and co-ordinated thought, and it is something we must now collectively tackle to ensure the best outcomes for members.’

Notes for editors

Policy options for tackling the growing number of deferred members with small pots, is a Pensions Policy Institute (PPI) report sponsored by NOW: Pensions. It examines the growing problem of small deferred pension pots and how it might be addressed.

The PPI is an educational research charity, which provides non-political, independent comment and analysis on policy on pensions and retirement income provision in the UK. Its aim is to improve the information and understanding about pensions policy and retirement income provision through research and analysis, discussion and publication.

Par 60 Department of Work and Pensions, Open Consultation on the Default fund charge cap and standardised fund disclosure. Published 25 June 2020 ‘Whilst we recognise the additional challenges and risks the flat fee structure can present, there is a case for the value it delivers to some savers. A complete ban on the flat fee structure, even limited to dormant/deferred pots could therefore eliminate competition and push charges upwards, whilst restricting choice for employers. This could lead to poorer retirement outcomes for scheme members.’

More information

Samantha Gould –
NOW: Pensions
Instinctif Partners
Dirk Paterson –The Corporate Comms Shop
Tel: 07944 866 2896