At worst, there is a risk that small pots slip through the cracks and become lost – thereby negatively impacting savers’ retirement outcomes. They are also far more likely to be cashed in than larger pension pots, which also threatens the sustainability of retirement incomes. For the industry, the ongoing administration of small pots causes a considerable drag on pension systems.
The problem is worsening. The Government estimates deferred small pots will result in wasted administration costs of around £750mn a year by 2030. Therefore, the Department for Work and Pensions is proposing that deferred small pension pots, ones of less than £1,000, can be transferred to a consolidator’s scheme if a year goes by without further contributions. This will be automatic but subject to the member not opting out of the process.
It should be noted that the context behind this proposal is that it, like several others, is part of the government’s drive to encourage pension schemes to invest more in alternatives and illiquid assets.
Below is a summary of Mercer’s response to the call for evidence in relation to small pension pots.
- Mercer supports the ‘multiple consolidator’ approach whereby a small number of schemes are authorised to serve as consolidators of small pension pots.
- This contrasts with the single consolidator approach, which we believe to be both uncompetitive and would allow for a cumbersome ‘pot follows member’ scenario. The single approach could see pots fail to ‘catch up’ with members who change jobs frequently and would present the risk of many expensive transfers.
- Mercer also believes all consolidators should come under the first condition of The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021. The main benefit of this would be that a statutory transfer could proceed without any further investigation.
- Mercer proposes that approved and registered consolidators should be master trusts, given the authorisation and supervisory regime is already in place.
- However, should a non-master trust be permitted to be a consolidator, the legislation would need amending so such a consolidator would meet the ‘first condition scheme’ definition in the 2021 regulations. This would help avoid additional due diligence each time a transfer has to be carried out.
- Mercer supports the proposed use of a ‘clearing house’, or central registry, to help preferred consolidator schemes be identified by members. This would be an external body that communicates with the sending and receiving pension schemes. However, in time, a working pensions dashboard could make the use of such clearing houses unnecessary. With this in mind, we suggest a ‘lightly engineered’ solution be put in place while the dashboard is developed.
- Mercer believes the proposal’s current limit for pension pot eligibility – just £1,000 – should be closer to £5,000. This is simply due to our calculations that suggest small pension pots are likely to be larger than £1,000.
- For example, at Mercer, we calculated that a worker earning £19,000 per annum would likely amass £1,000 in just one year assuming statutory minimum contributions at 8% of qualifying earnings. As a result, a limit of £1,000 would do little to stem small pot proliferation.
- We also note Department of Work and Pensions (DWP) estimates that reflect the scale of the problem. DWP calculates that of the 20 million pension pots below £10,000, around 12 million are below £1,000. However, this accounts for just £4bn of assets. In contrast, deferred pots below £5,000 account for £18bn of assets.
For more information on Mercer’s response to the Government’s call for evidence and other consultations please contact Jonathan MacPherson at firstname.lastname@example.org