A first step towards fixing the small pots problem

The eagerly anticipated report of the Department for Work and Pensions (DWP) working group on small pots, which was published in December, sets out potential ways forward for resolving the problem. It will be tough to fix but the size of the problem is growing, meaning that it’ll be harder to solve the longer it’s left.

Small deferred pension pots have been considered a significant problem since the inception of automatic enrolment in 2012. It has always been the case that employees switching jobs would leave behind stranded pots. The phenomenon has multiplied under auto-enrolment because the policy brought in workers who shifted employment far more frequently and whose salaries were lower. The Pensions Policy Institute estimates that as a consequence of this combination of deferred pots and a mass workplace pension system, there’ll be 27 million dormant small pots in circulation by 2035.

Small pots are an issue for providers, particularly the master trusts which serve the auto-enrolment market, because they may never generate the fees required to cover the costs of their administration. Regulatory levies are currently also calculated by number of members rather than assets. This has the consequence that regulatory costs have fallen disproportionately on schemes with large numbers of deferred small pots. These are the schemes which have picked up the bulk of the millions of employees brought into pension saving by automatic enrolment.


Higher financial burdens for schemes becomes a problem in turn for active members, since a cross-subsidy is required from the fees charged to them to cover the cost of administering the unprofitable pots. The problems for savers don’t end there. A trail of small pots makes it difficult for those employees with small pots to keep track of their pensions and to keep on top of what they need to save in order to generate a reasonable retirement income. Both members and providers have a strong interest in fixing the problem and both will benefit from removing unnecessary costs from the workplace pensions system.

Potential solutions

The working group’s report is a reasonable first step and gets a lot right – both the working group and DWP have done well in a short time to synthesize diverse views and come up with a way forward.

The first thing they got right is that there’s a need for an automatic solution to consolidate small pots held by different providers. The experience of Australia and small dormant super accounts is that the number of pots an individual has grows early in someone’s working life and they aren’t voluntarily consolidated until people approach retirement. Having a dashboard that facilitates voluntary consolidation, like Australia, hasn’t been enough to solve the problem.

The second thing they get right is the importance of administration reform. Again, the main lesson of the international experience is that transfers need to be cheaper, exchange of data needs to be rendered easier by an industry-wide standard and there’s a need for a rock-solid identity verification process so that automatic consolidation can be done securely.

The key insight here is that fixing known administration problems might enable quite a wide range of different options for consolidating small pots. Administrative reform creates a pitch on which more than one game might be played.

The second insight is that there are a lot of potential overlaps between the administration changes needed to power a consolidation solution and the components of the pensions’ dashboard. It seems likely that the data standard to be used by the dashboard might be used as the basis for a standard that might power a consolidation system.

There’s a lot more work to be done on consolidation models as well. The report recommends further work on pot follows member and on “consolidators”. The former would consolidate dormant pots to the active pot, while the latter would establish a single destination for all an individual’s deferred small pots. Both DWP and industry will need to look in more depth at how these consolidation options might work. Ideas that initially seem attractive can rapidly seem much less attractive as work progresses and technical difficulties emerge.

Member exchange

The report also recommends that the industry take forward work on “member exchange”, a variant of pot follows member. Member exchange is attractive as it might be possible to consolidate small pots using the bulk transfer regulations. This would obviate the need for further legislation and might enable master trusts to make faster progress on the problem.


The amount of work required now is, frankly, gargantuan. There needs to be a durable partnership between the pensions sector and the DWP in order to reconfigure a large part of how workplace pensions work.

Response to small pots report

On Thursday, December 17, the Department for Work and Pensions published the report from the industry’s small pots working group.

The publication of the report and its recommendations is an important step towards small pot consolidation within the automatic enrolment market. The Pensions Minister Guy Opperman MP has indicated he will study the report and recommendations in detail in 2021.

Tim Gosling, head of policy at The People’s Pension, who sat on the master trust expert panel that fed into the working group, said: “This report lays out a workable roadmap for dealing with the small pots problem. The scale of the challenge is significant: without action the problem will become much harder to manage and will destroy value for members. We welcome the Minister’s support for industry to lead on proof of concept trials, including support for the member exchange pilot.”


The People’s Pension response to the DWP consultation

The People’s Pension response to the DWP’s Investment Innovation and Future Consolidation consultation

The People’s Pension response to the DWP’s Investment Innovation and Future Consolidation consultation

Responding to the DWP’s Investment Innovation and Future Consolidation consultation, Gregg McClymont, director of policy at The People’s Pension, said:

“Pension fund management is not a cottage industry. It demands economies of scale. Pension scheme members would be better served by fewer, much larger schemes, run in the interests of their members and able to leverage the economies that come with genuine scale.

“But there is also a need to think about the consolidation process and how trustees will choose a new scheme. It’s important that the consolidation process is genuinely competitive. The Competition and Markets Authority’s recent investigation into the fiduciary market suggests there is much work to be done to ensure competitive tenders”.