Why the small pot problem could be the solution to the UK’s pension woes

The UK’s Small Pots problem has long been a pain point for both trusts and members alike, with any hopes of wide-scale consolidation dashed by the mountains of paperwork and long hours involved, thanks to the siloed nature of the market. While many schemes may be waiting for that first piece of regulation to spur them into action, why wait?

Instead of looking at advanced markets like the Netherlands and Canada and longing for the efficiency and consolidation they’ve developed, we should be taking notes.

In Australia, for example, the sector moved first before Government regulations came into effect. And if we look closer to home at the recent feasibility report from Pensions UK, it’s also concluded that the solution to this problem needs to be industry-driven. But why, and more importantly, how?

Why we can’t wait

The ultimate aim of the pensions market is to deliver the best possible outcomes for the average worker, but at the moment, more could be done. Compulsory contribution rates have been stalled at 8% since 2019, and 73% of the population is estimated to have a pension income below Pension UK’s recommended level for even a moderately comfortable retirement living standard.

While much of this is dependent on government action, there are steps the industry could be taking to drive better outcomes sooner rather than later.

According to the Pension Schemes Bill, if we carry out widespread small pot consolidation, retirement savings could be boosted by £1000 for the average worker. But if the industry waits until the Bill eventually passes through approval, it could be 2030 before we see any movement on this. And in the meantime, the average worker won’t see any benefits.

Building new foundations