Pension Schemes Bill series – Consolidation of small pots

The Pension Schemes Bill marks a significant milestone in the UK’s ongoing effort to modernise and streamline the defined contribution (DC) pensions landscape. In this article we focus on the provisions designed to introduce a framework to consolidate small, deferred pension pots. 

Key points

• Initially will apply to dormant pots of £1,000 or less (‘small pots’);
• Multiple default consolidator option to be used (rather than pot follows member);
• Framework in Bill to be supported by regulations;
• Target date for new regime going live is 2030.

Context

The growth in small pots over the past decade is attributed in large part to the success of automatic enrolment, as well as to increased job mobility, which together have resulted in many workers accumulating multiple small pots across different schemes. These pots are frequently hard to access, sometimes forgotten completely, and generally costly to administer.

The previous Government estimated in 2023 that small pots were costing £225 million per year in administrative costs and levies and that automatic consolidation would bring tangible financial benefits for members, claiming relative gains of around £1,000 per saver. The planned reforms aim to reduce waste, improve transparency, and ensure that savers are better connected to their pension savings.

It was announced in the King’s Speech in July 2024 that the Pension Schemes Bill 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”. As we set out in our April 2025 article, the Small Pots Delivery Group (SPDG) published a report ahead of the Bill which gave us an indication as to the shape of the new framework, which will be based on the “multiple default consolidator” model, rather than the “pot follows member” alternative that had been considered.

Which schemes will the new automatic consolidation regime apply to?

The new automatic consolidation regime will apply to auto-enrolment schemes (being schemes used for automatic enrolment of eligible jobholders under the auto-enrolment regime established in the Pensions Act 2008). This is clear from Clause 20 of the Bill, which gives the DWP power to make so-called “small pots regulations” requiring that dormant small pots in auto-enrolment schemes are moved to or held in consolidator arrangements.

Which pots will be subject to the duty to transfer?

To be in scope a pot (held in an auto-enrolment scheme) must be both “small” and “dormant”. “Small” is defined in Clause 20(2) as meaning a pension pot with a value is £1,000 or less (but not nil). There is scope already built into the Bill for this to be amended in future – Clause 32 is a power for the Secretary of State to make regulations amending the definition to a larger or smaller amount.

“Dormant” has a specified meaning too. Under Clause 20(3) a pension pot is “dormant” if:

1. no contributions have been paid into the pot “during such period of at least 12 months as is prescribed”; and
2. the member has not taken any steps "to confirm or alter the way in which the pension pot is invested” (other than such investment decisions as may be prescribed in regulations)

So, the details are to follow in regulations but the Bill prescribes that the length of time that a pension pot has not had any contributions into it must be at least 12 months.

Certain pots will be exempt. Under Clause 23 this includes schemes where conditions (to be prescribed by regulations) are met and “the trustees or managers of the scheme that holds it determine that it is in the best interests of the individual for whom the pot is held that it should not be transferred in accordance with small pots regulation”. Examples given in the accompanying explanatory notes include where a pot holds a protected pension age, or is held in a scheme that provides for a particular religious belief.

What happens to the small pots?

Authorised default consolidator schemes will be created – these will be those master trusts that apply to the Pensions Regulator to become authorised consolidators or FCA-authorised schemes. The April 2025 report by the SPDG said it expects “significant interest” from existing master trusts, especially the larger ones, in becoming authorised default consolidators. The Bill includes regulation-making powers to set out the conditions to be met for master trusts to be authorised by TPR as consolidator schemes. Under Clause 27(3) these could include conditions relating to the scheme’s terms and fees charged as well as its value for money rating.

Unless the member opts out, the small pot will be automatically transferred to the authorised consolidator who holds their largest single pension pot. The member will be notified of the consolidation proposal in relation to their small pots via a “transfer notice” which will set out the default proposal, the alternatives available and how they can opt out of the transfer – see Clause 22 for more details about transfer notices.

A Small Pots Data Platform will be created (known as the Clearing House when the small pots consolidator was first floated under the previous Government). This central hub will act as the intermediary between the transferring auto-enrolment scheme and the receiving consolidator scheme, assisting with ID verification and matching member data with pots that have already been created.

Contractual override

As highlighted by the SPDG report, a new power will be needed for contract-based pension providers to make bulk transfers without consent in order to make the new automatic consolidator model work. This is found in Clause 41 which sets out a proposed new Part 7A to be added to the Financial Services and Markets Act 2000 (FSMA). The new contractual override will:

• apply to an FCA regulated scheme that is either: 
  • an auto-enrolment scheme;
  • a workplace pension scheme that is not an auto-enrolment scheme; or
  • meets conditions prescribed in regulations
• allow the provider of the scheme to amend the scheme’s terms or investments, as well as to transfer the pot to another scheme (whether operated by the same provider or a different one)

Proposed new s117B(2) FSMA specifically provides that such a change or transfer can be made notwithstanding that it breaches a term of the scheme – a consent requirement is included as an example.

Member protections

The contractual override is a substantial new power and a number of safeguards are built into the Bill to protect members:

• Importantly, exercise of the power is subject to a best interests test – a unilateral change can only be made where the provider reasonably concludes that that test is met. The “best interests test” in this context is defined as meaning that “it is reasonably likely that effecting it will achieve:
  1. a better outcome for the directly affected members of the scheme (taken as a whole);
  2. no worse an outcome for the other members of the scheme (taken as a whole)

          than the relevant alternative” action(s). 

• There is an independent review requirement to be satisfied – the reviewer (whose expertise will have to meet FCA specified criteria) will be required to certify, amongst other confirmations, that the best interests test is met; and
• There is a requirement for members to be given notice of the proposed exercise of the power via a “unilateral change notice” which will have to be sent to members directly affected by the change, as well as anyone else the FCA might specify in rules.

For trust-based schemes who are in scope of the new automatic consolidation requirements, they already have an equivalent power to make bulk transfers of money purchase benefits without consent under the Preservation Regulations if specified conditions are met.  This is not overriding in the same way as the new power in the Bill will be for contract-based schemes, and therefore scheme rules must also allow for such a transfer.

When is this happening?

Having been trailed heavily in the SPDG report, the workplace pensions roadmap for implementation of the new regime is broadly as expected, with an ultimate target date for the new duty on schemes to kick in in 2030.

• 2027/28: regulations to be made pursuant to the Pension Schemes Act (once in force) that will bring in the proposed changes will be developed and consulted on
• 2029: it is anticipated that the new authorised consolidators will be chosen
• 2030: the relevant duties to consolidate will be in force.

What actions should trustees and providers be taking now?

For trustees and providers of DC schemes, there will be important steps ahead to prepare for the changes envisaged by the Bill:

• Data readiness: member data will need to be accurate and a process put in place so that eligible pots can be identified and correct transfers made.
• Governance review: for trust-based schemes, trustees will need to make sure that these allow for compliance with the new framework – e.g. is there a power to make bulk transfers of member pots? Is member consent required?
• Engagement with consolidators: master trusts and FCA authorised schemes will need to consider whether to apply for consolidator status. With the push for scale in the DC market (discussed in our earlier article in this series), could becoming an authorised small pots consolidator vehicle be part of a flight plan for reaching scale requirements?
• Member communications: trustees and providers will need to prepare to explain the changes clearly and reassure members about protections and benefits. With member engagement and understanding levels low, this is a challenge not to be under-estimated.

Trustees and providers can view these developments in the context of the rollout of pensions dashboards, which the reforms are designed to complement. While dashboards will not be the mechanism for consolidation, they are expected to increase member awareness of small pots, prompt voluntary consolidation in some cases, and support data matching efforts by schemes.

Burges Salmon are perfectly placed to assist you and your pension scheme with understanding the new requirements of the Pension Schemes Bill. If you would like to discuss the new small pots consolidation regime or any other aspect of the reforms for DC schemes, please contact Susannah Young or your usual Burges Salmon pensions team contact.

This article was written by Louise Pettit and Hayden Searle.