Small pot consolidation: Government policy takes shape

Key points

As expected, consolidation will be via a system of multiple default consolidators (MDCs). Trust-based consolidators will need to be authorised master trusts which meet prescribed conditions, including as to scale and value-for-money.

A central hub will allocate members between consolidators, except where members choose otherwise. For members who do not already have a pot with a consolidator, allocation will be on a "carousel" basis.

The Government recognises the challenges which large-scale consolidation will bring. A long lead-in time is proposed. Primary legislation will be included in the forthcoming Pension Schemes Bill, but the main requirements are unlikely to come into force until 2030.

Background

In November 2023 the Department for Work for Pensions, under the previous Government, published proposals for the consolidation of small pots on an MDC basis. The DWP proposed that:

• A pot would be in scope if it was in a default fund under an auto-enrolment scheme, had received no contributions for at least 12 months, and did not exceed £1,000.
• A scheme would be required to transfer an in-scope pot to a default consolidator, but with the member having the chance to opt out or choose for themselves.
• A central hub would underpin and support the MDC system.
• Consolidators would be subject to authorisation and supervision.

After publishing its proposals, the DWP established a Small Pots Delivery Group, to help decide how the proposals could best be implemented.

The new Government indicated in the King's Speech that measures for small pot consolidation would be included in the Pension Schemes Bill.

What's new

The Government intends to proceed with the DWP's 2023 proposals, including the principles outlined above.

As regards implementation, the Government has published a report which sets out the recommendations of the Small Pots Delivery Group and its own responses.

• The central hub will operate on a streamlined basis. The hub will be responsible for identity verification, data matching and facilitation of the consolidation process (including allocation of members to consolidators). But the hub will not be involved in asset transfers. Given the hub's limited remit, it will be known as the Small Pots Data Platform, rather than the Clearing House as had previously been proposed. The hub will be funded by pension schemes through the General Levy.
• There will be a prescribed basis and standards for data matching, which schemes will be required to meet. To ensure that all members can benefit from consolidation, schemes will be required to take reasonable steps to improve their data where necessary.
• There will be just two touchpoints for communication with members about the consolidation process: one at the start of the process (once the relevant consolidator has ben determined), and one when it is complete. The initial communication will be sent by the ceding scheme, rather than by the central hub as had previously been suggested. The post-completion communication will be sent by the relevant consolidator.
• Members who do not choose otherwise will be allocated to a consolidator on a "largest pot" basis and via a carousel. In other words, if a member already has one or more pots with a consolidator, the member will be consolidated into the largest of those pots. If the member does not have a pot with any of the consolidators, a consolidator will be allocated using a carousel system.
• The framework for authorisation and supervision will build on that for master trusts. Trust-based consolidators will need to be authorised master trusts which meet additional requirements, as to scale (assets under management), value-for-money and protection for members against flat fees. The Government will work with the Financial Conduct Authority to establish a corresponding framework for contract-based providers.
• Any consolidator will have to operate on a "whole-of-market" basis, ie it will not be permissible for a scheme to operate as a consolidator in respect only of its existing members.
• Schemes will be allowed a period of 12 months in which to complete the transfer process, once a pot has been identified as being in-scope. The Government will engage with the industry and encourage innovation, to drive efficiency and help contain costs.
• A liability framework will be needed, to ensure that members are suitably reinstated if errors are made in the consolidation process. The role of the Pensiosn Ombudsman will be extended for these purposes. The Small Pots Data Platform will meet the cost of reinstatement in cases where it is to blame. That cost will not be passed back to the industry through the General Levy.
• There will be a phased approach to implementation, recognising the large number of transfers which will need to be made initially, and the time which it will take for the industry to prepare.

Looking forwards

The Government will arrange a Feasibility Review in respect of the Small Pots Data Platform. The review, led by the Pensions and Lifetime Savings Association, will begin in spring 2025. It will consider how the Platform can be built in the most effective way. Among other things, the review will determine whether parts of the dashboards ecosystem might usefully be replicated for consolidation purposes. The review will report to the DWP in June 2025.

Measures as to consolidation will be included in the Pension Schemes Bill, to be published in spring 2025.

In 2026 the Government will consult with the pensions industry on draft regulations.

Some elements of the legislation may take effect in 2027/28. Duties to consolidate are likely to come into force from 2030 onwards.

Comment

There is widespread support for the consolidation of small DC pots, but the scale of the challenge should not be underestimated. 13 million pots are currently in-scope, and the number is growing by a million each year.

In a foreword to the report just published, the Pensions Minister promises to supply further information about sequencing and timing in the coming months, "as I am aware of the amount of reform and the need to make it work".