We need new ideas for lost pension pots

The number of ‘lost’ small pension pots is a growing problem in the UK.

The success of automatic enrolment means for most people that every time they change employer, they build up a new pension pot. But this is leading to people having multiple small pension pots scattered around employers and the industry. The PPI reckon small deferred pensions were worth £26.6 billion in 2022.

This raises challenges for both the member and the provider. The member has to manage multiple small pensions, monitoring their performance, and making decisions, which can turn pension engagement into an administrative nightmare. The extreme scenario is they lose track of the pot completely, probably more likely if there are only a few pounds in it.

The provider also has challenges. Smaller pension pots can be costly to administer, and it’s problematic when members don’t tell providers they have moved houses or changed their email address and stop logging on to check their pension’s progress. This extra administration can weigh down providers’ ability to improve administration or reduce charges.

So bringing these pots together makes sense. The problem is that at the moment, the member has to initiate that. And not enough people do.

So, the DWP has brushed off its dusty file marked ‘small pots problem’ and put forward two ideas on how to automatically consolidate pension pots. But neither of these are new – one is at least 15 years old.

The first is to create a consolidator clearing house to accept deferred small pots and allocate them to a consolidator scheme. This could be the member’s first automatic enrolment scheme or alternatively either one the member chooses or, if the member didn’t decide, one allocated from a carousel system.

The second idea is to resurrect the idea of ‘pot follows member’, where an individual’s previous pension is automatically transferred into their new pension plan.

However, both proposals rapidly bump up against problems, already pointed out in the past. What happens if the automatic transfer isn’t in the member’s favour or preference? For example – to a higher charging scheme; or a lower-performing investment; or a default fund that doesn’t match their ethical or environmental views.

There are other risks. Some pension plans may offer valuable guarantees – such as higher tax-free cash or guaranteed annuity rates – which could be lost on transfer. Any automatic system may start with just automatically enrolled pots which may not encompass these types of plans. And certainly the higher tax-free cash problem could easily be solved by just allowing people to keep this entitlement on transfer.

But what disappoints me is how unoriginal the DWP’s proposals are. We have been around this loop a few times already and had these discussions before.

It is also largely avoiding the big elephant in the consolidation room. Pensions dashboards.

In the DWP’s call for evidence, it pitches pensions dashboards as a useful way to identify lost pensions. But it is missing the bigger picture. The FCA is consulting on how commercial dashboards could work, and what ‘post view services’ an organisation hosting a dashboard could offer. Although these won’t include an overt consolidation trigger, they are a stepping-stone in the consumer journey to bringing their pensions together.

Wouldn’t it be better to allow pensions dashboards to play a more prominent role? Instead of automatic consolidation, dashboards can give members better information and help them compare plans, so that they can choose whether to consolidate, and if they do, then do it easily and simply. After all, dashboards will go live to the public in the next 18 months, and this technology could be leveraged to help people manage their pensions in a better way, if not in this first phase of dashboards, then in the next iteration.

The DWP needs to stop going back to dusty old ideas for pension consolidation and start thinking about how the post-pensions-dashboard world will work.