Small pots solution moves a step closer

Solving the ‘small pots’ problem has been high on the government agenda for some time.  In today's workforce, individuals change jobs more frequently than in the past. As a result, individuals often lose touch with pension schemes they were briefly part of, leaving these schemes with deferred small pots that are disproportionately costly to administer.

In a welcome development, the DWP has published a report which outlines the work of the Small Pots Delivery Group. It sets out the Delivery Group’s recommendations and confirms the government’s proposed approach in some areas relating to the design and implementation of a multiple default consolidator solution. 

We are pleased to have contributed to the report through our role on the Technical and Administration Expert Panel that assists the Small Pots Delivery Group.

An industry led Feasibility Review will now be undertaken to determine the central infrastructure needed to support this solution. Legislation to enable the government to implement the proposed solution is also set to be included in the Pension Schemes Bill, expected this summer

Proposed solution: multiple default consolidator

As previously announced, the government is proposing to introduce a duty on schemes to require the consolidation of small deferred pension pots. Pots in scope will initially be (broadly):

• pots with a value of £1,000 or less
• held within default funds (in workplace, auto enrolment schemes), and 
• where no contributions have been paid in for at least 12 months

Schemes will be required to transfer eligible pots to an authorised small pots consolidator. Pots will either need to be transferred to a consolidator chosen by the member or, where a member has not made a choice, their pot will be transferred to:

• the consolidator in which they currently have the largest pot, or
• where a member does not have an existing pot with a consolidator, a consolidator allocated on a carousel basis

Small Pots Data Platform

The government proposes to create a ‘Small Pots Data Platform’ through either a government body or an outsourced provider. The Platform will support pension schemes to transfer millions of eligible deferred small pots automatically on behalf of their members.

The Delivery Group recommends this platform should be responsible for the following key roles: 

• data verification - including confirming that member data is correct, the scheme has followed the correct process and the pot is eligible
• data matching - the Platform will use information provided by a scheme to match a member to the relevant consolidator, and
• facilitating the consolidation process - including checking for previous consolidation to identify the correct consolidator for a member
  The Delivery Group recommends a feasibility review is carried out to more fully develop the role and remit of the Small Pots Data Platform to ensure a cost-effective solution and to understand the strengths and weaknesses of different approaches. This review will be led by the Pensions and Lifetime Savings Association (PLSA) working with the wider pensions industry. It is due to start in Spring 2025 with key findings reported back to DWP in June 2025, so the necessary legislation can be included in the Pension Schemes Bill. 

Outstanding issues

As well as determining the role and remit of the Small Pots Data Platform, there are a number of other issues highlighted in the report that still need to be settled. These include:

• authorisation criteria for consolidators – the report indicates the authorisation regime for consolidators will build on the existing master trust authorisation framework (with consideration being given for how this might be extended to contract-based schemes). The Delivery Group has recommended that the additional authorisation criteria for consolidators should include a scale threshold (based on AUM), suitable value for money ratings, protection for members against flat fees and a requirement that a consolidator is already consolidating members with multiple pots within its own scheme. The government has also confirmed that any consolidator will need to be open market and it will not be able to restrict the small pots it will accept to those held by existing members
• how the transfer process will work – the report recognises the need for an efficient automatic transfer system to be developed to make the solution cost-effective for the industry. The Delivery Group has recommended that schemes should be given a 12-month period to transfer out deferred small pots – this timeframe will start from when pots become identified as eligible for consolidation to enable schemes to transfer small pots in bulk and to manage their own business models effectively
• member communications - the Delivery Group has recommended that two communications are sent to members as part of the consolidation process: one at the start; and the second after the transfer has taken place. The form and content of these communications is still to be determined. The Feasibility Review will consider whether the Small Pots Data Platform should have a role in issuing communications or whether this should be left to the sending and receiving schemes

Data quality

The report highlights the importance of schemes and providers improving their data quality in order for the proposed solution to be effective. The report proposes that pot matching would be based on key member data including a member’s name, address, date of birth and national insurance number (where this is known). To ensure all members can benefit from consolidation of their small pots, therefore, schemes and providers will be required to take reasonable steps to improve their data as part of the consolidation process. The government is encouraging schemes and providers to undertake this activity in advance of the introduction of these new legal duties.

Next steps 

The report confirms the government plans to include legislation in the Pension Schemes Bill to enable it to implement the proposed small pots solution. Once the Bill has received Royal Assent, the government intends to consult with industry on implementing regulations during the course of 2026 with elements of the legislation expected to come into force during 2027 / 2028. However, the government does not expect the duties on pension schemes to transfer and consolidate eligible pots to come into force until 2030 (with a phased approach to implementation expected). 

Finally, the government recognises the need to carefully consider the sequencing and interaction of the implementation of the small pots solution with the other pension reforms that have been announced and the outcomes of the ongoing Pensions Review. Therefore, it plans to develop a roadmap setting out a clear direction to enable industry and businesses sufficient time to prepare for the changes.

Further comment

This is another important step towards implementing a solution to reduce the growing number of stranded small pension pots, which currently stand at over 13 million. However, there is still a lot of detail to be worked out. Significant work also needs to be done within the industry to improve data quality so that members’ pots can be successfully matched. Therefore, this will not be a quick fix.

The final policy design will also be impacted by other initiatives such as the roll out of pension dashboards and the government’s proposals to drive consolidation and scale within the DC workplace pension market. We welcome the government’s plans to set out a clear roadmap for how and when these various initiatives will be delivered.

Look out for our next edition of DC Practical Notes (due beginning of June) for detailed commentary on the proposed infrastructure and consolidation carousel, what different types of pensions schemes will need to do and how this development will tie-in with other policy initiatives, including the new value for money framework and DC scale and consolidation proposals.