For small pots to be consolidated at scale, the UK will not get around setting up some form of centralised system, a new report by the Pensions Policy Institute suggests. But can this government admit that dashboards are only second best? 

 

The government having decided to shelve a pot-follows-member proposal indefinitely following industry pressure, the UK pensions industry is finding itself with a rapidly growing pile of small pots, to the detriment of members. The Pensions Policy Institute estimates that the number of such pots in master trusts alone could balloon from 8m to 27m by 2035, with the average master trust account holding around £1,000. 

 

Small pots are a problem because they can be eroded by charges and members can more easily lose track of their pensions – leading to poorer living standards and a growth in dormant assets. They also make the system less efficient, with the risk that any extra costs are passed on to the members. Ultimately, the government’s worry is that it could undermine the success and popularity of auto-enrolment, if reputational and fiscal risks play out. 

 

The pensions dashboard, a much-touted project to offer savers a better overview of their pensions, was initially viewed by many as a solution to the issue. However, there is now growing consensus that dashboards on their own will not lead to sufficient consolidation.

The government’s own small pension pots working group reported back in December, finding among others that member-led consolidation alone is unlikely to change the trend in the growth of deferred small pots, but has batted the ball into the industry’s court, saying it should focus on enabling auto-consolidation. 

 

Now the PPI, tasked by the government-convened Master Trust Expert Panel with researching international systems, has also concluded that dashboards are best used to complement other ways to consolidate small pots. Unlike the working group, it emphasises solutions that the government would need to provide. 

 

 

Having looked the pension systems of Australia, Ireland and the US, as well as those of eight other countries, its main conclusions are that unique identification numbers, centralised transfers via a central platform or several connected platforms, and unified data standards make for more effective consolidation. 

 

Dashboards, it found, are generally associated with higher levels of consolidation, particularly where they come with a communications campaign, and could show comparative data like member charges, the PPI says; the UK’s pensions dashboards will only signpost websites where users can find information about costs and charges, making comparisons difficult for individual users. 

 

However, “a national consolidation system will achieve more significant improvements than a dashboard on its own,” the report states. 

 

Looking at pot-follows-member, as operated in Israel, Norway and the US, the PPI found that this “significantly reduces the number of small, deferred pots”, with the main stumbling block seemingly that “pension providers will need to cover the transfer costs”. 

 

This could be solved by introducing a central data platform, unique identity numbers and a national pension reporting data standard, which “would lead to a significant reduction in transfer costs under this policy model”.  

 

 

The PPI notes that the process of creating a central platform is itself long and costly. These costs might however be inevitable if the issue is to be addressed. 

 

Daniela Silcock, head of policy research at the PPI and the author of the report, pointed out that countries like Australia, Chile, Ireland, Mexico, New Zealand, Sweden and the USA have centralised aspects through data standards, data platforms and clearing houses of their pension transfer and management systems as part of their system to keep the number of small pots low. 

 

“Centralisation plays a crucial role in minimising harm from small pots because policies generally either involve pots needing to move from scheme to scheme –  for example, pot follows member – or for employers to pay contributions to many different schemes on behalf of members,” for example through a lifetime provider, she said. 

 

“While these systems are helpful, they are also expensive and take a long time to develop.  However, the UK is on its way towards developing some aspects already via the pensions dashboard which will at least lay the groundwork for a national pensions data standard and could help with development of data platforms,” Silcock added, saying the UK has an opportunity to learn from the experience of other countries. 

 

 

An automated solution is needed in the UK, said Tim Gosling, head of policy at master trust the People’s Pension, noting that in Australia, the dashboard “hasn’t prompted much consolidation of small pots”. 

 

"We think that there is a huge amount of work ahead of us, specifically on transfer costs, identity verification and data standards,” he said, arguing that administrative reform is a pre-requisite for any of the policy options on the table, with all the options needing similar systems changes.  

 

“Everyone’s got a favourite solution but none of that really matters until the administrative issues are resolved,” he said. 

 

 

Tim Gosling

Gerald Wellesley

Darren Philp