While automatic-enrolment has resulted in more individuals saving for retirement, it has created a separate issue that the Department for Work and Pensions (DWP) describes as ‘the proliferation of small pots’: the creation of multiple deferred pension pots, often low in value, when employees change employer. Lack of engagement with pensions has compounded the problem, with many individuals leaving their small pots behind rather than consolidating them, which can lead to poorer retirement outcomes. In its November 2023 call for evidence, the DWP stated there are over 12 million deferred pots under £1,000.
To address the problem, the DWP consulted during 2023 on a system to automatically consolidate existing small pots. The DWP published its response as part of the Autumn Statement, alongside a new call for evidence looking at the possibility of a pot for life in the longer term, which could stop new small pots being created.
A pot for life would involve employers contributing to an individual’s existing pension pot rather than enrolling them into a new workplace scheme. A central clearing house could tell employers where to send the contributions.
While a lifetime provider system could have important benefits, the potential challenges for employers should not be underestimated; identifying a provider, considering whether an employer’s own arrangement would provide better outcomes, and explaining this to employees against a backdrop of pensions inertia, combined with setting up payroll systems to deal with contributions to multiple providers, would be no mean feat.
The proposals are at a very early stage, with many details still to work through. Careful thought needs to be given to a potentially seismic shift away from the UK’s current employer-led pension provision as limiting employer power to provide for employees in retirement potentially risks reducing engagement further, resulting in less, not more, security for individuals.
Emily Whitelock is senior associate at Sackers