Tackling the small pots issue
The Pensions Policy Institute (PPI) recently published a briefing document entitled Small pots: what are they and why they matter, setting out the problems associated with small pots and some possible solutions. The aim is to support the DWP’s Small Pots Working Group in finding the best option to deal with this burgeoning issue.
The DC universe has grown very quickly over the last few years due to the requirements of automatic enrolment. Employees who meet certain age and salary thresholds have to be automatically enrolled into an occupational pension scheme by their employer. If the employee move jobs, they will need to be automatically enrolled again by their new employer. Usually that means joining a new pension scheme and creating a new DC pot. This explains why, in future years, the number of DC pots are expected to grow.
We are already seeing the difficulties that small pots create in our work advising DC schemes and their providers. Firstly, they create added administration and cost issues as it is harder and more expensive to look after many thousands of pots. Secondly, they are not helpful when it comes to encouraging members to take an interest in their pension benefits because they are so small. It is difficult to get excited about a benefit that is worth only a few pounds.
The Government sees the introduction of the Pensions Dashboards as an important first step to managing the small pots issue. It is true that if the project works as planned, Pensions Dashboards should enable people to keep track of their pension savings which will address one of the key problems – loss of contact. After all, you cannot value something when you don’t know it exists. Having a single point of contact that gathers all pension information together in one place could improve member engagement, although we would agree that Dashboards are unlikely to resolve the small pots problem on their own. They need to be coupled with other “nudges” or even “pushes” for benefit consolidation to really take off.
As the PPI report makes clear, each potential solution to the small pots issue has its advantages and disadvantages, and there are also commercial and market force implications to take into account. This makes a combination solution the more attractive approach. Whichever combination is ultimately chosen, the Government should aim to put the measures in place soon and avoid any further delay. This issue has been debated on and off over the years and, with no resolution, the number of small pots are only increasing.
What should savers do?
As for how savers can manage and track down their pension savings – people need to remember that this is their money. Pensions are often parked in the To Do List for “tomorrow” rather than “today” – nobody likes to think about getting old, particularly if you’re a long way from retirement. However, pensions are crucial to being able to retire and, as we have seen during the current pandemic, are one of the first ports of call by older people in need of financial support when they lose their jobs.
It may be that in time the small pots problem becomes a thing of the past. Until then, anyone enrolled into a scheme will need to keep the details somewhere safe with other savings records, particularly if they change employers. There’s no need for anything fancy, just a file with details of the scheme name, its contact details and your membership number (if there is one) will do. If an individual has already lost track of previous pension arrangements there is a free government tracing service which can be used, the Pension Tracing Service.