On 30 January, the Department for Work and Pensions (DWP) published a call for evidence on how to deal with the proliferation of small, deferred, defined contribution (DC) pots created by the automatic enrolment of workers with short periods of service. The focus is on developing automated models to consolidate members’ benefits and is intended to build on the work carried out by the Small Pots Cross-Industry Co-ordination Group (and its predecessor group) published from 2020 to 2022.
The DWP will consider eventual solutions against five criteria:
The call for evidence asks for input on some technical matters, such as the maximum threshold below which smaller pots will be subject to automatic consolidation – with options of £1,000, £2,500, £5,000 and £10,000 being floated. The DWP asks for views on whether they should also set a minimum pot size, for which a refund might be more appropriate. The call also seeks sensitive commercial information from schemes, which the DWP will keep confidential, about such matters as the average cost of a pot transfer and the average cost of administering DC pots.
One of the decisions is what period of inactivity should trigger consolidation with a period of time since contributions were made the favoured option. The call also recognises the difficulties that may arise where a member’s pots with an associated ‘protected pension age’ are consolidated – leading to different tranches having different ‘normal minimum pension ages’ – and proposes that all such transfers should lead to the protected age applying across all benefits in the receiving scheme.
The document concentrates on two possibilities – a default consolidator route and a ‘pot follows member’ route. In addition, the ongoing work on ‘member exchange’ is mentioned. This is where a small, closed group of schemes agree to exchange data with ‘dormant’ pots being automatically moved to whichever scheme has the associated members’ active pots. The DWP also asks why some schemes do not currently consolidate multiple deferred small pots for the same member when they have two or more periods of service under the same scheme.
In relation to consolidators, the DWP remains undecided, and seeks views, on:
Regarding ‘pot follows member’, the call for evidence sets out what DWP sees as the potential benefits and implications of this approach and seeks views as to whether stakeholders agree.
In both cases, DWP acknowledges that “it will be important to have an agreed liability model in place for trustees, providers and others involved in the relevant processes, to rectify any erroneous transfers that occur through automated consolidation solutions”. However, it considers that this can better be examined once a decision has been made regarding the better route and will come back to this as part of a future consultation on policy proposals.
In addition, views are sought on whether the initial focus should be on measures to address the existing ‘stock’ of accrued small dormant pots, or whether to address the ongoing ‘flow’ of newly created ones.
The call for evidence runs to 27 March 2023.
