Fears over DWP’s plans for central registry to end proliferation of deferred small pots

The pension industry has raised concerns about the Government’s proposal for a central registry to end the proliferation of deferred small pots.

The Pensions Management Institute (PMI) and Association of Consulting Actuaries (ACA) are among a growing number of industry bodies who have said they would prefer to see the formation of clearing house system instead of a central registry.

They were responding to the The Department for Work and Pensions (DWP) eight-week consultation Ending the proliferation of small deferred pension pots which closes at midnight on 5 September.

Tim Middleton, director of policy and external affairs at PMI, said: “The proposed clearing house, having oversight of all pension scheme and their members, will help provide a more efficient approach, as often delays are experienced between members transferring schemes and receiving schemes. This approach – where the clearing house can contact members directly – will keep things moving.” 

However, he added that PMI’s main concern was the cost and time it will take to create an entity. 

He said: “We have seen in the past that new systems … can become expensive, with costs spiralling from the initial estimates. How will this be funded? Also, how long will such a clearinghouse and appropriate systems take to set up, test, and become usable?  

“There will also be concerns about data protection as there has been for pensions dashboards.” 

He added: “The idea of a central registry, which is an extension of the pensions dashboards, will be accepted with all sorts of concern. We have seen the delays creating pensions dashboards, and something additional at this stage could undermine any success the pensions dashboard might have.” 

Pensions dashboard

Middleton’s comments were echoed by the ACA, which claimed a clearing house would remove the administrative burden on providers and schemes, but added that establishing it would require substantial planning and investment to make it operational. 

Tess Page, chair of ACA’s DC committee, said: “We agree with the clearinghouse idea. A central registry feels like it would have a lot of overlap with pensions dashboards. We need greater clarity on how the clearing house will operate. How does the clearing house decide where the pot goes?”  

Page warned of scenarios in which members could be worse off by transferring if their employer currently pays scheme charges.  

Page added that in this scenario, the clearing house may need to do some sort of value for members’ assessment to assess the difference between the original scheme and the consolidator’s scheme to ensure the members get a positive outcome.  

She added: “With the proposals, there remains a possibility that some members might be worse off as a result of consolidation. We would therefore suggest that ‘safe harbour’ regulations are put in place to protect both the sending and receiving scheme from future claims by members.” 

Auto enrolment and small pots

The consultation, was launched as part of the Mansion House reforms in July, consultations and calls for evidence were announced to address the investment remit of pension schemes, auto-enrolment, a new value for money framework, pension dashboards, wider retirement choices for trust-based scheme members, and extensions to the concept of collective defined contribution (CDC) schemes.  

In July the Department for Work and Pensions flagged up a multiple-consolidator approach as a possible solution to the issue of deferred small pots. 

At the timeLaura Trott, minister for pensions, said the growth of deferred small pots was a longstanding issue that presented huge challenges to the automatic enrolment pensions market. 

Without intervention, it warned that deferred small pots would result in wasted administration costs of a third of a billion pounds per year by 2030 for pension schemes and would severely reduce the value for money the schemes can provide to their members. 

Standard Life also raised concerns about the Government’s proposed default consolidation option, in which any deferred pots under £1,000 will be transferred to a pre-determined consolidation destination. Instead, it urged the Government to revisit the concept of “pot follows member”.  

Gail Izat, managing director for workplace at Standard Life, part of Phoenix Group said:  “Our first preference would have been for a ‘pot follows member’, whereby pensions under a certain size automatically transfer when people change jobs. It’s an easy concept for consumers to understand, and in a charge cap environment, concerns about the value for money offered by receiving schemes are lessened. There is also the extra convenience with the ‘pot follows member’ approach – that legislation already exists.” 

She added that the consolidator model could run the risk of distorting competition, as the process for selecting the consolidators is not yet clear.  

She added: “If members are allocated to the first scheme they were automatically enrolled into, there is the risk of entrenching existing market positions. It also risks further complicating the pensions system for savers due to the potentially cumbersome nature of the process and complex terminology.” 

Izat added this option requires the creation of a clearinghouse or central registry, the cost of which will be substantial and could outweigh the potential benefits of the solution.  

She added: “The establishment of a central data point also raises concerns about the security risk of holding so much pensions data in one place. When designing the Pensions Dashboard, it was agreed that there would not be one point of data storage for this reason – and the principle stands here.” 

Izat added that if the Government chooses to follow through with the default consolidator option, then the process of selecting consolidators should be in the best interest of the saver.  

Small pots: Finding consensus

Royal London also has raised alarms that the default consolidator model is likely to be confusing for savers and complicated to implement. 

Jamie Jenkins, director for policy and communications at Royal London, said: “It’s good to see the desire to conclude the longstanding debate on deferred small pension pots. “However, the default consolidator model is likely to be confusing for savers and fiendishly complicated to implement. We would like to see the role of the pensions dashboard and its architecture at the heart of any solution, alongside a reconsideration of the ‘pot follows member’ approach, which feels eminently more intuitive for savers.” 

Quilter also urged the Government to keep the system simple, suggesting that consolidating small pots to a central provider could make the workplace pensions market more profitable.  

Jon Greer, head of retirement policy at Quilter, said: “We would urge the DWP to not create complexity in the system. It isn’t clear that the consolidation of small pots to a central provider will destabilise the workplace market – if anything, it could make the majority of the workplace pensions market more profitable if administration of such small pots is taken out of the ‘main system’.” 

The Investing and Saving Alliance (TISA) warned that several years of Government and industry discussions, meetings and consultations have shown that while there is a strong support for addressing the issues on small pots, consensus has been difficult to achieve a single practical solution. 

Renny Biggins, head of retirement at TISA, said: “While a balance needs to be struck, we should be placing member outcomes at the centre of considerations. TISA would like to see that where a consolidator has not been proactively selected small deferred pots are consolidated into active pots where possible.” 

As such, Biggins added that it is important that a deferred small pot regime operates across both Trust-Based and Contract-Based schemes.  

Biggins added: “The operation of two separate regimes for each scheme would undermine the objectives of the initiative itself as well as what we are trying to achieve more generally with the pension framework and consumer journey.  

“In our view, not only should the process of consolidating small posts be as simple as possible with consumer outcomes at its heart, but the adoption of open transfer standards must also be further promoted. Without this requirement, third party software costs of processing any transfer could be prohibitive and risk further undermining the objectives of this policy.” 

Value for money

Steven Cameron, pensions director at Aegon, said the industry needs a comprehensive implementation plan with so many links and inter-dependencies between the multiple changes planned. 

As such, Aegon has told the Government to implement the changes for small pots around 2028 to 2029. It added that this should not be implemented until after the first wave of scheme consolidation prompted by the VFM framework and till dashboards are embedded. 

Cameron said: “The Government and regulators have gone into overdrive with a highly ambitious and radical pack of pension policy proposals. With so many links and inter-dependencies, we need a ‘grand implementation plan’, which in light of the forthcoming general election would hopefully have support across political parties.   

“This will include setting priorities, reflecting both a logical sequence but also importantly the size of potential improvements in member outcomes.” 

A similar sentiment was reiterated by Nigel Peaple, director of policy and advocacy at the PLSA, who said: “With its package of consultations over the summer, the Government put forward an ambitious set of proposals to deal with some of the key issues facing pensions.

“Some of the proposals put forward by Government on defined benefit schemes are worth examining further, others less so. In all cases, it is imperative that the regulatory safeguards that protect savers pension benefits are not compromised.”