Private-sector employees tend to get a new pension pot every time
they change employer. This means people who work for many
different employers over their career often end up with many
different pension pots, some of which can be very small.
In 2023, there were an astonishing 12.1 million defined
contribution (DC) pension pots worth under £1,000 which are no
longer being contributed to (‘deferred'). In aggregate, these
contained over £4 billion. These numbers have increased rapidly
in recent years and will continue to grow further without policy
action.
The proliferation of these small pension pots matters. It is
costly for pension providers due to the fixed costs of
administering a pension, leading to higher charges and lower
returns for savers. And having savings spread over many small
pension pots makes it easier for people to lose track of their
savings, and harder to make sensible decisions on how to use
their wealth through retirement.
The status quo is therefore not fit for purpose. Perhaps, most
ridiculously, it often leads to some individuals having more than
one pension pot with the same provider.
That is a key conclusion of new research, published today as part
of The Pensions Review, led by the Institute for Fiscal
Studies in partnership with the abrdn Financial Fairness Trust.
We consider the policy responses available to government and
find:
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There is a strong case for deferred small pension pots
to be consolidated by default, with people being given
the option to opt out of this consolidation if they wish. This
would reduce the stock of uneconomical pension pots, and it
should make it easier for people to manage their savings. This
could be done by automatically moving all the money in
someone's deferred small pension pots into either the scheme
run by their current employer, or into one of a number of
default funds. This would not increase the administrative
burden on employers.
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There are merits of going further than just
consolidating small pots, and moving towards a system where
people end up with one DC pension pot, or only a very small
number of these, as they approach retirement. This
would help people make good decisions on drawing their pension
savings through retirement. There are several ways to achieve
this, each with their own set of trade-offs and potential
impacts on the DC market. The preferred policy will depend on
the weight policymakers put on ensuring all individuals end up
with a single pot as well as the government's aims for the
future structure of the DC market. For example a system where
an individual's past DC pots all, by default, move into their
most recent pension pot – known as ‘pot follows member' – would
have many advantages.
Laurence O'Brien, a Research Economist at the Institute
for Fiscal Studies and an author of the report, said:
‘Automatic enrolment has been a huge success in getting more
employees to save in a pension. However, without policy action,
many will end up with their savings scattered across several
small pots by the time they reach retirement. This status quo is
not fit for purpose: it is uneconomical for pension providers,
leading to higher charges for savers, and it makes it harder for
individuals to make good decisions on how to use their savings.
Policymakers should help savers out by ensuring that, by default,
their deferred small pots are consolidated together. This would
lead to lower average charges and make it easier for individuals
to keep track of all their savings. One potentially
attractive option is for an individual's pensions to be combined,
by default, into their most recent pension. What is not
attractive is the status quo that generates many millions of
pensions worth under £1,000.'
Mubin Haq, Chief Executive at abrdn Financial Fairness
Trust, said:
‘In recent years there has been a rapid rise in the number of
small pension pots. This particularly affects lower earners and
women. The new Pensions Dashboard will help many to keep track of
their pensions, but it will not necessarily lead to consolidation
of these pots. Further action is needed to reduce the complexity
of managing small pension pots, which should result in gains for
employees as well as providers.'
