The Government has at last taken a decision on small pots. It is the right decision.  Employers choose pensions ,  payroll is not a pensions clearing house.

I’ve written several times about the need to auto-combine small workplace pension pots which are a threat to the reputation and operation of auto-enrolment. These arguments are in Laura Trott’s foreword to the DWP’s Call for Evidence “Addressing the challenge of small defined contribution pots”

It’s actually more a policy statement than a call for evidence, the Government has made up its mind , what “good” looks like. Here are the 5 criteria;-

1. Delivery of overall net benefits for members through improved value for money outcomes, achieving a meaningful impact on the number of existing, and flow of new, deferred pots.
2. Complements member engagement on their savings journey/retirement planning.
3. Supports a competitive, sustainable and more efficient workplace pensions market (trust and contract-based schemes).
4. Minimising complexity and administrative burdens for employers.
5. Commands confidence in the system for savers and tax-payers.

It’s hard to disagree with the methodology , but let’s face it, we are a good six years into the work of the small pots working group and we need to be looking at solutions , not calling for more evidence!

We’ve got the evidence…

There is clear evidence that the small pots is not going to be solved by member engagement. It won’t be solved by a pension dashboard, partly because the dashboards won’t be transactional but mostly because we can forget about a BAU dashboard culture till 2027 at the earliest. Most people want pensions done for them and those who are proactive are busy consolidating. Pension Bee has 200,000 consolidating savers, there’s the evidence that some people can look after themselves.

The Small Pots Working Group examined the distribution of deferred small pots by size. In their 2020 report, 74 per cent of a sample of 11.2 million deferred pension pots were smaller than £1,000. There’s your evidence that for every consolidating saver , there are twenty times that number who have a “small pots problem”.

So let’s get on with it

The previous Pensions Minister was keen that the pensions industry sorted this problem, this was a mistake. Instead of sorting it, they argued amongst themselves about arcane nonsense like normal minimum retirement dates and possible legal consequences of denying someone a small pot the right to take it at 55 rather than 57. Nest hasn’t even built a bult transfer system to transfer pots out. Shame on the industry.

The current minister seems to have learned the lesson and has decided

• a small pot is £1000 or less
• details about “period of inactivity” and NMRD can be sorted at the back end
• a clear statement of the intended solution is arrived at without further delay

So here is the solution – a small pot consolidator

Under this model, deferred small pots which meet the chosen eligibility criteria for automatic consolidation would transfer automatically to a small pot consolidator, with members being given an opportunity to opt-out if they want to. There are a variety of a ways through which a member could be allocated to a consolidator scheme. Some industry representatives have previously suggested this could be based on the consolidator being the scheme that a member is enrolled into when first automatically enrolled into a workplace pension. Alternatively, a member could choose from a list of approved consolidators and where the member does not take the opportunity to make an active decision, they could be allocated to a consolidator from a carousel system.

And here’s the detail the Government would like the industry to puzzle out between them

1. Do you agree with the above summary of potential benefits and implications of the default consolidator/s approach, and if not why?
2. What are the key benefits / risks of a multiple default consolidator and single default consolidator approach, including impacts on the wider pension market, and employers?
3. Who should be able to be a consolidator; should there be a limited number, and, if so, how many, and why?
4. What would be the appropriate approach to giving members choice in terms of choosing their consolidator, and what approach should be taken if the member did not make an active choice?

There are some additional questions

Stock or flow

Does the Government require member exchange to happen to eliminate the stock of small pots within the large master trusts using “member exchange” or does it focus on the flow of future deferred pots  (using the consolidator). The answer is  both, the bold move is to go for the stock, the “flow” solution isn’t going to root out the malignancy.

If the mastertrusts can’t do stock , worse luck for them. Member exchange does not have to be universal, it can rely on local deals. The flow solution will take time and primary legislation. Trott is a pragmatist, she should get the stock problem sorted by the providers who have most to gain by sorting it. If they cannot make member exchange work, they will be hurting themselves and the vfm they offer their members.

Flow is for the future and the Government should make sure it delivers a centralised clearer rather quicker than its pension dashboards.

Pot follows member (a pot for life) – isn’t happening

We’d all like a pot for life – conceptually.  But being able to take a pot with you from employment to employment makes a demand on payroll to clear to multiple providers and payrolls do not consider themselves as clearing houses.

I have heard it said (most notably on the VFM podcast) that this consultation leaves the door open for a pot for life, it does no such thing.  The central consolidator sends money to a provider you did not choose and your next provider will only be your consolidator out of chance.

The role of the employer in choosing the workplace pension is not diminished, nor the responsibility of the employer to ensure that the choice remains value for money.

This is right, a system where the employer and the employer’s payroll loses any sense of the company’s pension , is severely weakened by this employer disempowerment.