The Pensions Policy Institute (PPI) has published a report examining the growing problem of small deferred pension pots and how the issue might be addressed.
The number of deferred pension pots in the UK is likely to rise from 8m in 2020 to around 27m in 2035. Member charges often erode small, deferred member pots over time and small pots can be uneconomical for providers to manage.
Extra management costs may eventually be passed on to members through increased charges.
Policies aimed at consolidating pots are likely to provide a better long-term solution than tackling charging structures.
The PPI report considers the potential impact on small pots of the following policy options:
- Dashboards: platforms that allow members to view all pots with different providers in one place and could facilitate more consolidation (though this is not the sole intention of dashboards, which are designed to enable informed pension decision-making).
- Same provider consolidation: returning members are re-enrolled into their deferred pot.
- Pot follows member: pots move with members to new employer’s schemes.
- Member exchange: a form of pot follows member, which allows for the reassignment between schemes of all existing pots into the current active scheme.
- Lifetime provider: members remain with the same provider throughout their working life.
- Default consolidator: pots deferred for a year, transfer to a consolidator provider, with members being given an opportunity to opt-out.