Options to help workers to achieve better retirement outcomes, including those with several small pension pots scattered around, are being looked into by the Government.
With the average worker having around 11 jobs over the course of their career, some may end up with multiple small pension pots.
This creates a risk of people losing track of their savings as well as the admin costs and inefficiencies created for pension providers of maintaining them.
A call for evidence on small pension pots has been launched Department for Work and Pensions (DWP), applying to England, Scotland and Wales, and will run until March 27 2023.
It looks at the potential scope for the automatic consolidation of some pots, as well as recognising the impact of other actions, including enabling more member engagement, that could help.
Two options which would automatically bring more pensions together include a default consolidator, where small pots would automatically be transferred into a scheme; and ‘pot follows member’, where a pension pot would follow an employee when they move jobs and automatically move with them to their new employer’s scheme.
Sir Steve Webb, a former Liberal Democrat pensions minister who is now a partner at consultants LCP (Lane Clark & Peacock) said: “It has been obvious since the start of automatic enrolment (in 2012) that small pots would be an issue, which is why the 2014 Pensions Act provided for a pot-follows-member solution.
“Unfortunately, this was not seen through and, nearly a decade later, we are still at the stage of ‘calls for evidence’ followed by further consultation. What is needed is for someone to take a decision and move ahead with implementation.”
The DWP is also undertaking various other pensions initiatives, including a consultation on a new value for money (VFM) framework, developed in partnership with the Pensions Regulator and the Financial Conduct Authority, which sets out how schemes will be expected to provide savers with better value from their investments and the quality level of service.
The VFM framework will improve competition between defined contribution (DC) pension schemes and require pension schemes to disclose key metrics and service standards, the Government said.
Minister for pensions Laura Trott said: “Since 2012, automatic enrolment has transformed the pensions landscape in the UK for the better, but we know there’s more to be done to ensure a fairer future for savers.
“Being in an underperforming pension scheme can lead to someone missing out on thousands of pounds. The value for money framework and our new measures will improve security and create better returns for savers, so they can enjoy the retirement they’ve worked so hard for.”
Tom Selby, head of retirement policy at AJ Bell said: “There are now millions of people in workplace pension schemes, including many with multiple pots from previous jobs. As things stand it can be difficult for people to compare the performance of those pensions, and often people are nervous or fearful of engaging with their retirement fund.
“Introducing a common approach to disclosing performance would at least make it a bit easier for people make comparisons and understand what they’re really getting from their workplace pension.”
Phil Brown, director of policy at People’s Partnership, provider of the People’s Pension, said: “Value for money is essential to ensure that people have a complete and clear picture when consolidating their savings, allowing them to make the right financial decision for their future.”
He added: “To ensure savers can easily compare their provider’s performance, making pension companies prominently display their value for money data on pension dashboards would be the most sensible future approach.”
Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA) said: “The PLSA supports all efforts to improve the pension incomes of everyone in the UK, and so we welcome this package of reforms, which aims to boost the prospects for the growing proportion saving into DC schemes.
“The reforms proposed today have the potential, over time, to enable savers to benefit from greater efficiency and value from the management of their pensions, including through the consolidation of small pots which people have accumulated through their careers.”
Yvonne Braun, director of policy, long-term savings, health and protection at the Association of British Insurers (ABI) said: “We’re pleased the Government recognises the need to introduce legislation to solve the small pots problem, which was a key recommendation from the ABI and PLSA small pots coordination group report last year.
“Member-led consolidation, while important, will only go so far. To materially reduce the millions of small pots, a whole of market automatic transfer model is likely to be required, and legislation will be crucial to compel providers to take part in the solution.”
She added: “We support the focus on value for money, which includes investment returns for savers and service standards, as well as cost.”