Automatic consolidation of small pension pots – a timeline for implementation

After a quieter period on the policy front through the end of winter and early spring, yesterday (Thursday 24 April) came the first signs that momentum is picking up again when it comes to driving forwards pensions reforms, with a press release from the Pensions Minister, Torsten Bell, announcing that reforms will be made to allow for the automatic consolidation of small deferred pension pots into “one high performing pension”. 

In many ways this isn’t new news – the Kings’ Speech back in July last year promised us a Pension Schemes Bill that would include measures to “enable an individual’s deferred small pension pots to be automatically brought together in one place to maximise income in retirement, and deliver value for money for savers”.  This signalled the new Government’s intention to take forwards the work begun under the previous administration to consolidate the large and growing number of small deferred pension pots, which has increased exponentially in recent years following the success of auto-enrolment. 

However, whilst the press release itself is light on detail, published alongside it is the report from the Small Pots Delivery Group (SPDG). The SPDG was established following the November 2023 response to a consultation on solving the deferred small pots challenge – its purpose was to support the DWP with “developing and designing the multiple default consolidator policy”.  The report (published yesterday) sets out the recommendations of the SPDG, together with the Government’s conclusions

There is much for the industry to digest in the detail of the report but some points that immediately jumped out on initial reading include: 

• The Government is pushing forward with the proposed “multiple default consolidator” approach for consolidating small pots – the “pot follows member” alternative that had been the subject of a call for evidence under the previous administration has been shelved as expected;
• Consolidation will be automatic but members will have the right to opt out.  Member trust and confidence in the new system will therefore be critical to its success, and effective communications will be vital;
• Known as the “clearing house” under the earlier consultation, now called the “Small Pots Data Platform” there will be a key central hub for the multiple default consolidator model, responsible for data matching and ID verification.  More detail to be worked out in the forthcoming feasibility review discussed below;
• The SPDG recommended a two tier approach to authorisation of consolidator schemes but the Government response indicates it intends to proceed with a “whole of market” approach on the basis that this “will result in significant interest from the larger providers to act as default consolidators resulting in a competitive market, which supports great member outcomes”.  The Government agrees with the Group’s recommendation that the authorisation criteria should be “built out” from the existing master trust authorisation framework; and
• A new power to make bulk transfers without consent for contract based pension providers will be required in order to make the new automatic consolidator model work.

And importantly we now have an indication of proposed timescales.  Chapter 11 of the report sets out that:

• In the upcoming Pension Schemes Bill (which the DWP has indicated elsewhere it is aiming to publish before the summer recess), it will legislate for the multiple default consolidator approach;
• A feasibility review will be undertaken, led by the PLSA, to look at issues such as the digital infrastructure required and the best operating model for the Small Pots Data Platform.  This will commence in Spring 2025 with key findings reported back to the DWP in June 2025 “informing decisions to support the passage of the Pension Schemes Bill”
• Following Royal Assent of the Pension Schemes Bill, through consultation with industry regulations will be drafted “during 2026”, with elements of the legislation expected to come into force during 2027/28
• Duties on pension schemes to transfer and consolidate eligible pots are likely to come into force from 2030

Early industry reaction has been positive, though no doubt the timescales will be considered both ambitious (given the scale of work to be done), and at the same time drawn out (given a small pots consolidator has been under consideration for some years already). Quoted in the FT Adviser, the executive director of regulatory compliance at the Pensions Regulator, Gaucho Rasmusson, said “Having lots of small pension pots erodes value and makes retirement decision-making difficult.  We welcome steps to solve the problem and will support the government and industry to make these plans a reality.

Yesterday’s announcement is no doubt the first of many developments and publications over the coming weeks with a number of consultation responses, the final report on Phase 1 of the Pensions Review and the Pension Schemes Bill all expected to land imminently so do keep an eye out for further updates.