Jessica O'ConnorThe Government has launched pension reforms aimed at tackling the growing issue of small, forgotten pension pots.
Unveiled today, Thursday 24th April, by Pensions Minister Torsten Bell, the initiative will introduce a small pensions pot consolidator as part of the upcoming Pension Schemes Bill.
The move is expected to boost the average worker’s pension pot by around £1,000 and save businesses £225m annually in administrative costs.
Currently, there are around 13 million small pension pots – each worth £1,000 or less – with an estimated one million new ones created every year as people change jobs.
These fragmented savings can be difficult to track and are often subject to flat-rate charges that erode their value.
Under the new legislation, small pots will automatically be merged into a single, good-value pension scheme unless individuals choose to opt out.
The consolidator scheme will be required to meet strict criteria, including being part of an approved automatic enrolment pension and demonstrating scale and value for savers.
Bell said: “It’s great news that more people are saving for their retirement. But I want to make pension saving as simple and rewarding as possible.
“There are now more small pension pots in the UK than pensioners – raising costs and hassle for workers trying to track their savings. It also costs the pensions industry hundreds of millions of pounds every year.
“We will automatically bring together people’s small pots into one high performing pension, reducing costs as well as hassle for savers.
“In time this could boost the pension of an average earner by around £1,000 as part of our Plan for Change to put more money in people’s pockets.”
The announcement follows the recommendations of the Small Pots Delivery Group, which proposed the creation of a Small Pots Data Platform to help identify eligible pots and a framework to regulate consolidator schemes.
Protections for savers, including opt-out rights and safeguards against excessive charges, are built into the model.
The Pension Schemes Bill, set to be introduced in Parliament later this spring, is part of a broader Government strategy to drive growth through increased investment in the pensions industry.
The bill is expected to benefit over 15 million people and increase pension pots by an average of £11,000.
Industry bodies and consumer groups welcomed the reforms.
Zoe Alexander of the Pensions and Lifetime Savings Association said the changes would reduce complexity and costs.
She said: “The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike.
“The PLSA has worked extensively with industry and the DWP to propose solutions and supports the model being proposed by the Government.
“We look forward to working on delivering the recommendations of the Small Pots Development Group and are pleased the Government is tackling this long-standing issue in the Pension Schemes Bill.”
Rocio Concha, Which? director of policy and advocacy, said: “Which? called for the consolidation of small pots under £1,000 before the election, so we are delighted that the government is committing to doing this – a move that will provide greater value for savers and support them to keep track of their pensions.
“Which? looks forward to working with the government to ensure the pensions system is fit for the modern age.”
Gail Izat, workplace managing director at Standard Life, part of Phoenix Group, added: “The number of small pots in the system is growing at a rate of knots and ultimately heightens the risk that people will lose track of their hard-earned savings.”
