The UK Government has announced a policy to help workers track their retirement savings. This will be done by consolidating all small pension pots. Torsten Bell, the Pensions Minister, announced this initiative on 24 April. It will be implemented through the Pension Schemes Bill.
This reform addresses a growing problem with small, fragmented retirement pots that are created when people change jobs during their career. Currently, 13 million pension pots are worth less than £1,000. The number of pension pots in the UK continues to grow by around one million each year.
This can cause workers to experience unnecessary administrative burdens and result in lower returns because of multiple flat-rate charges. This situation results in an extra PS225 million of administrative costs each year for pension providers. The new scheme is designed to reduce costs by automatically transferring small pension pots from individuals into a single scheme that meets the criteria for value for money. Individuals can still opt out.
Reforms aim to reduce costs, simplify the management of pensions and boost economic growth. The government estimates that the average earner will benefit from an increase in their pension pot of approximately PS1,000 over time.
Savings schemes and saving money
Torsten Bell, Minister of Pensions, said that the initiative will simplify the pension process and reduce inefficiencies throughout the industry.
It’s wonderful that more people are saving money for retirement. I want pension saving to be as easy and rewarding as possible. The UK has more pensioners than small pots, which means that workers are having to spend more money and deal with more hassle in order to track down their savings. The pensions industry also loses hundreds of millions every year, he added.
We will combine small pension pots to create one large, high-performing pension. This will reduce costs and hassles for savers. As part of the Plan for Change, this could increase the pension for an average earner’s by approximately PS1,000 over time.
The initiative will also reduce the administrative burden for employers who manage workplace pensions.
How the scheme works
Small Pots Data Platform is being created to identify and match pension pots that are eligible for consolidation. Providers must meet certain criteria to become consolidator schemes, including being part an Automatic Enrolment-qualifying scheme, showing adequate scale, and providing value for money. There will be additional member protections, such as a clear opt out process.
The Pension Schemes Bill, which is due to be introduced into Parliament in the spring, will formalise and codify these provisions. According to the government, this bill will affect over 15 million people in the UK. It could also increase pension savings for some individuals by as much as PS11,000.
Zoe Alexander of the Pensions and Lifetime Savings Association’s Director of Policy and Advocacy, has welcomed the reforms.
The accumulation of small pots is a source of unnecessary complexity and cost for both savers as well as schemes. The PLSA worked closely with the DWP and industry to develop solutions, and they support the model proposed by the Government.
We look forward to implementing the recommendations of Small Pots Development Group, and we are happy that the Government has addressed this long-standing problem in the Pension Schemes Bill.
