Small pension pot issue needs to be solved but solution needs to be ‘joined up’ with industry changes
Pensions & benefits DC pensions
LCP has welcomed the publication of today’s interim report from the PLSA and ABI which investigates the problem of small pension pots. However, it is important that any solution joins-up with the raft of initiatives that are currently happening in the DC space.
The report lays out the scope of this problem. It is believed that currently more than 3 million deferred savers are invested in default options with pot sizes of under £100 and there are 10.5 million savers in total with pot sizes under £1,000. At this stage the focus of the working group has been finding solutions for pots of less than £500.
Tim Box, Senior Consultant, at LCP, commented: “It’s good to see the scale of the small pot pension issue being acknowledged in this report. While we agree with the thrust of the report that savers will benefit from the consolidation of these smaller pots because of reduced complexity and greater efficiency, the sheer scale and complexity of the issue should not be underestimated.
“A real complication to finding a solution is the current rapid pace of change happening in the DC pension space. Scheme consolidation and dashboards are already competing for resources so it’s vital that any small pots policy is joined up with these other initiatives. If not, member outcomes risk being compromised.
Stephen Budge, Principal in LCP’s DC team, added: “The report proposes a regulatory change so that members pensions can be transferred without consent to facilitate consolidation. That may make sense to those who run pension schemes so that the necessary scale and efficiency to make small pot consolidation work but care will be needed to also convince scheme members this is in their interest and that is why the report calls for further cost/ benefit analysis to understand the scale of any potential detriment to savers that may be caused.
“We also agree with the PLSA that the previous “pot follows member” legislation from 2014 should be reviewed to see whether it can be resurrected to fit in with current thinking on small pots.
“Whatever solution is recommended by this group it is clear that it will need continued strong support from government and regulators, and will probably require enabling legislation. Therefore what we need to see at the next stage is a firm set of proposals that can be implemented by government, regulators and providers.”