Small pension pots – the proposed multiple default consolidator solution

As anticipated in the updated pensions roadmap, the DWP has now published the latest consultation under the Pension Schemes Act 2026 (PSA26) reforms.  This policy consultation sets out the Government’s proposed approach to addressing the growing number of small defined contribution (DC) pension pots accumulated by members across multiple pension arrangements. This aims to reduce fragmentation, improve efficiency, and support a better functioning pensions market.

This is a far-reaching area of reform which will have a wide-ranging impact on pension arrangements. We consider the ‘pathway for consolidation’ proposals and explain how the multiple default consolidator model is intended to operate. 

Further information on the roadmap milestones, together with a range of useful tools and resources on the wider PSA26 reforms, is available on the Burges Salmon PSA26 webpage.

• The scale of the issue

As automatic enrolment has become embedded, increasing numbers of pension scheme members are building up small deferred pots across multiple employers, making it increasingly easy for those pots to be overlooked or lost over time.

• According to the Pension Schemes Bill Impact Assessment Summary 2025, there are estimated to be around 13 million deferred small pension pots worth less than £1,000 across the workplace pensions market.
• That number is expected to increase by more than one million each year.
• Annual administration costs associated with these pots are estimated at around £240 million, with members generally bearing those charges.

Low levels of member engagement, the risk of losing track of savings, and the potential for poor value for money have driven a longstanding desire, across both Government and the pensions industry, to find a workable solution to this growing issue.

• How will the solution work?

Under the proposed multiple default consolidator model, eligible small pots (initially those worth £1,000 or less and which have been inactive for at least 12 months) would be automatically transferred to an authorised consolidator scheme.  Members will be able to opt-out or choose their own consolidator.

The core proposal 

Both trust-based and contract-based pension arrangements will be required to transfer eligible small dormant pots to a limited number of authorised consolidator schemes, without requiring individual members to initiate the transfer themselves.  The model is designed to function without member engagement while preserving meaningful choice for those members who wish to exercise it - inaction results in the pot being automatically consolidated.   

Eligibility criteria

To be eligible for consolidation, a pot must: 

1. be held within a DC, charge-capped default fund in an auto-enrolment scheme with the pot having been created after the introduction of auto-enrolment on 1 October 2012;
2. have received no contributions for a period of at least 12 months; and 
3. have a value of £1,000 or less (but greater than zero).     

For these purposes, a default arrangement is one in which contributions are made and invested without the member having expressed an active investment choice. Self-select investment arrangements (where a member has actively chosen how their pot is invested) are excluded, as are pots within religious or values-based schemes, Sharia-compliant funds (at least initially) and smaller schemes with 100 members or fewer.     

Pots that carry certain guarantees or protections, such as guaranteed annuity rates or survivor benefits, may also be excluded where the guarantee cannot be replicated on transfer, although trustees and scheme managers will retain discretion to consolidate such pots where the practical benefit of the guarantee is limited. Members will have the right to ‘opt-in’ to a transfer where the guarantee cannot be preserved. 

Pots with a ‘protected pension age’ enabling access before the Normal Minimum Pension Age (currently age 55, increasing to age 57 from 6 April 2028) will not automatically be excluded from consolidation as this protection is expected to be capable of being retained on a block transfer. However, trustees and scheme managers will again need to exercise discretion on whether to exempt the pot from transfer or whether the benefits of consolidation override.

The transfer process and member communications

Communications with members will be fundamental to the success of the consolidation process. A statutory transfer notice will need to be issued by the transferring scheme setting out the default proposal (i.e. the chosen consolidator), any alternative proposals, the consequences of non-response, the applicable notice period, relevant contractual information and key details about the member's pot.

Members will have a minimum of 30 days from the date the notice is issued to respond (this period seems short and we would not be surprised to see this extended in later consultation phases).   During this period, a member may: (a) take no action, in which case the pot will be transferred to the default consolidator; (b) opt out of consolidation entirely, in respect of that specific pot; or (c) select an alternative consolidator from the available options. 

The consultation also envisages two core touchpoints in the member communications journey: a pre-consolidation notice setting out eligibility, the process and timelines, and a post-consolidation notice from the receiving scheme confirming completion of the transfer. 

There remain open questions in the consultation regarding the options for members who already have an allocated consolidator scheme from a prior pot transfer and whether this should be the default consolidator for future pots (with an opt-out facility) or whether alternative consolidators should be available.

The authorisation regime for consolidator schemes

Only schemes meeting prescribed standards will be permitted to operate as consolidators. In the trust-based market, consolidator schemes must be authorised master trusts, subject to enhanced authorisation criteria overseen by the Pensions Regulator (tPR).  In the contract-based market, the FCA is empowered to establish a notification regime. 

The consultation identifies six key criteria that consolidator schemes must satisfy to ensure they are offering value for money, with a stated preference in the consultation document that consolidators comply with the broader scale requirements introduced by the PSA26. A number of questions remain unanswered regarding the consequences where consolidators cease to meet the standards in future or withdraw from the market.

Transferring scheme data requirements 

The model is underpinned by digital infrastructure. Delivering this policy will require pension schemes to: 

• identify eligible pots;
• determine where that pot should be consolidated (including whether a member already has a pot with a consolidator scheme); and 
• transfer the eligible pot to the appropriate destination. 

A common framework of rules, standards, and governance arrangements will support transferring schemes to do this at scale. However, the data quality and governance requirements should not be underestimated. 

Where a member does not already hold a pot with any consolidator, the destination will be determined through a "carousel" allocation mechanism, under which each authorised consolidator receives an equal proportion of deferred pots.   This approach is designed to ensure fairness and maintain competition within the market.

Employer duties

The consultation also introduces new requirements for employers to provide relevant and up-to-date information to pension schemes about their employees, supporting the accurate identification and matching of eligible pots.  This will be critical to ensuring the effective operation of the data-matching infrastructure, particularly for identifying circumstances such as extended parental leave or planned career breaks, where a pot should be temporarily excluded from consolidation. 

• Timings for small pots reform 

The small pots implementation plan is divided into two tranches, the first centres around ‘building the foundations’ with the second entitled ‘further consolidation considerations’. 

The pensions roadmap sets out a timetable for delivery through a myriad of planned activity, with Government confirming: “Our ambition is clear: to have small pot consolidation operational from 2030.”

• 17 November 2026: Initial policy consultation for tranche 1 closes.
• May 2027: Consultation on draft regulations for tranche 1 launched.
• June 2027: Consultations on the Pensions Regulator Code and FCA rules launched.
• December 2027: Policy consultation on tranche 2 launched.
• January 2028: Draft regulations laid and Parliamentary process for tranche 1.
• April 2028: FCA policy statement published.
• July 2028: Draft regulations for tranche 2 published.
• November 2028: tPR authorisation regime and FCA notification regime commence.
• March 2029: Draft regulations laid and Parliamentary process for tranche 2.

• April 2030: Small pots consolidation begins.

   

• What should trustees and employers be thinking about now?

The scale of change across pension provision, especially for DC arrangements, is significant. Trustees and employers should focus on keeping up to date on the forthcoming changes with which they will need to comply. 

To ensure a cohesive approach to the various DC pensions initiatives, trustees and scheme managers should consider developing a project plan so that decisions they are making on the solution for guided retirement dovetails neatly with providers who may seek to become a consolidator and who are on track to meet the DC Scale and Value for Money requirements. Operating each workstream in isolation risks causing confusion and inefficiency down the line given the scope of the changes ahead. 

Identifying areas such as protected pension ages, guarantees, and numbers of dormant deferred pots within default investment offerings early will help scope the scale of the project. 

Early engagement with pension scheme administrators is advised to discuss the data, communication and system requirements.  A review of scheme rules will be valuable at an early stage to understand what the bulk transfer rules currently provide for and whether any amendments will need to be scoped for as part of your DC reform project plans.

• Further support

The pace of pensions policy reform remains significant, and we will continue to bring you updates as the legislation and guidance evolve.  We are very well placed to assist schemes and their sponsors with all aspects of preparing for the DC reforms so please do get in touch with Susannah Young or your usual Burges Salmon pensions team contact if you would like to discuss any aspect of the pensions reforms. 

This article was written by Rachael Skuse