Death by 10 million pots – how to solve the small pot crisis

Prisoner exchange

Prisoner Exchange should be a win-win


There are 10 million new savers into workplace pensions. If every saver changed jobs 10 time, that would mean 100 million new pension pots- unless some means of rationalising pot proliferation can be found.

The DWP estimate that by 2050 there could be 50m “abandoned” pots, by which they mean pots that no longer get an employer contribution. For members of master trusts and policyholders of contract based workplace pensions, this means the prospect of a messy job trying to bring pots together to manage cash-flow in later life. For employers there is the prospect of fielding calls from long-lost employees tracing pension rights and for the operators of workplace pensions, this means a claims process that could wipe whatever profit the small pot ever generated.

This is why we are facing a “small pot crisis” and the time to do something about it is now. Preventative action is hard to  justify as it goes against the Mr Micawber inherent in the strategy department.


Mr Micawber Something  will turn up

The idea that “something will turn up” by means of Government Action or technological advance or some radical shift in saver’s or adviser’s engagement – is speculation. It is risky to speculate.

Which is why responsible and forward thinking master trusts and the managers of workplace GPPS are looking to solve the problem now. The radical solution , put forward by Tom McPhail of Hargreaves Lansdown calls for individuals to be able to tell employers where they want their money to go. This would involve employers being able to clear pension contributions to a variety of providers. To date most employers have struggled to manage an interface with one provider and it’s unlikely that many will voluntarily adopt clearing as an employee benefit. The prospect of a Government backed clearing system, as is in place in Australia is at least a decade away.

The second idea which is jokingly referred to as “prisoner exchange” sees workplace pension providers working with each other to pass small pots between each other so that the member is offered an automatic transfer of old pot to new. Providers I have spoken to envisage this happening with a member having to intervene to prevent the transfer (effectively an opt-out). The right to transfer to the next provider would be given to the old provider as part of the enrolment process.

This has the advantage of being relatively painless for employer and member and puts the administrative onus on the providers in who’s interest it is to clear-out small pots and to accumulate big pots.

The rules governing transfers are considerably more generous to transfers without consent under an occupational trust and it is not surprising that it is the master trusts that are pushing for “prisoner exchange” and the GPP and GSIPP providers who favour clearing.

There is however a major hurdle to be cleared before any progress is made – regulation. The FCA and Pensions Regulator have objectives to protect members. The enforced aggregation of pots, whether through clearing or transfer, requires the consent, no matter how passive, of members. The alternative would be against all the principles of freedom and choice inherent in our pension and savings systems.

While the vast majority of us savers would acquiesce to pot aggregation or the pot for life system advocated by Tom McPhail, there is a vocal minority who will favour self-determination and the right to stay put or indeed to transfer to a pot of their – rather than an employer’s choosing.

These people will demand evidence that what they move to (or stay with) is worthwhile. Currently there is no way of telling whether value has been attained by the member for the money he or she has put into their workplace pension. Consequently any regulator is likely to kybosh both approaches on the basis  that the majority of transfers will be “blind” and that those who save for a lifetime in the pot of their original workplace pension provider , may find themselves at retirement with a sub-optimal outcome.

Sub- optimal outcomes and blind transfers happen, but their has to be an opt-out process to ensure they needn’t.

At AgeWage we are working on a system that allows people to see the progress of their savings in terms of what they have got and what they have paid for it. We call it value for money scoring and an example is below.  We think that the kind of information members need to feel comfortable with pot aggregation could be in place by the end of the decade and we’re working hard to make sure it is.

agewage vfm

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Death by 10 million pots – how to solve the small pot crisis

  1. Bob Ward says:

    Hi Henry. This is a bigger potential problem than outlined, and reported elsewhere by individuals who whilst enlightened on the mathematical propensity of job changes alas do not fully understand the actual practical processing problems. Spare or obsolete ‘pots’ do not just occur when employees move employer, there already exists a plethora of duplicated member accounts due to: member leaving employer then returning (fresh accounts are created); employers allocating a new member identifier (some employers have even done this each financial year to tidy up and close gaps in their payroll sequential files!); employers quoting different member details of changing NI numbers (having had incorrect details at outset), member name changes. The tendency has been the smaller employer or less sophisticated payroll systems lack understanding of the data implications to providers, these occasions only come to light when the member queries or requests information.

    Then there are the AE (auto enrolment) rules which require ongoing Assessment (identifying the current ‘Status’ of members (Eligible, Non-Eligible, Entitled), Re-Assessment (3rd year anniversary), which could be affected by the amalgamation of a secondary account (and it’s history).

    Not insurmountable for sophisticated computer systems but it requires greater data efficacy within a single provider, which I am yet to see exists, let alone when transferring between providers.

    The consent of members, or ability to opt-out of a transfer is essential as terms of a new scheme may not be to the members benefit. The question is then posed of what to do with the potential few member ‘pots’ left behind in what may be an obsolete scheme, and whether there then may be created (by Regulators) a ‘forced transfer’ situation so a scheme can be closed (i.e. with the pre-requisite that charges must not be higher in the new scheme; could a new scheme provide different tiered charges for such transfers-in? Very doubtful in the current climate, although quite possible in the scheme I designed!)

  2. Stephen Glover says:

    I’m assuming your Age Wage scoring system only applies to default funds? I have managed to aggregate all my DC plan into one pot and I have freedom to alter the asset allocation, which I do from time to time. So in my case it would be impractically onerous for your system to disaggregate the performance of the pension provider (i.e. the default fund) from my own performance (i.e. the effect of my decisions taken away from the default fund). That’s fine of course, as the vast majority of DC pension savers are in default funds and these are the people to whom your AgeWage services are mainly, if not wholly, directed. It’s just a point of clarification.

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