The DWP stated this “approach should enable greater levels of consolidation to be achieved”. Nevertheless, “there will be some situations where it may cause complications and a consequent increase in administrative burden, for example, the position of multiple job holders”.
Member-exchange off the table
The member-exchange model, the trial for which initially ground to a halt due to changes in the minimum pension age legislation, has been dropped as a preferred solution by DWP.
For this model, the principles were tested with three master trusts, and can identify a small deferred pot in one master trust and an active pot in another master trust and merge the two into the active pot.
“While we do not believe that member exchange represents a complete solution to the small pots issue, we welcome this industry initiative as one which can make an early and immediate impact. It will provide evidence and analysis to support development and delivery of large-scale automated solutions,” the DWP said.
One of the reasons for DWP to prefer the two other models is that those solutions provide the least amount of administrative burden for employers, which is one of the five criteria the chosen approach to the small pots issue will have to comply with.
The other criteria include the delivery of overall net benefits for members through improved value for money outcomes, achieving a meaningful impact on the number of existing, and flow of new, deferred pots; complementing member engagement on their savings journey/retirement planning; supporting a competitive, sustainable and more efficient workplace pensions market and commanding confidence in the system for savers and taxpayers.
Other considerations
The government noted the deferred small pots challenge is a “two-pronged one", since there is a need to “design a solution that can address the existing stock of small pots, and which also tackles the continued flow of new small pots”.
“Recognising that it may not be easy to distinguish between the two,” the DWP is asking the industry if there be an initial focus on managing the flow of new pots or removal of the existing stock, and where does the balance of impact lie for each of the solutions presented.
The government is also keen on establishing what is the value of a pot to be considered small, since “setting the maximum value at too low a level may result in insufficient consolidation,” while if the limit is set too high, there is an increased possibility that members may be put at risk of greater detriment as a result of their pots being moved into a single scheme which has differing and more costly charge structures or lower investment returns”.
Finally, the government is also asking what the correct timeframe is to consider that a pot should be eligible for automatic consolidation.
