The Government has published a report by its Small Pots Delivery Group, and has responded to the Group’s recommendations. This paves the way for deferred pots in workplace defined contribution (DC) schemes to be consolidated automatically, “starting at those that are worth £1,000 or less”. Duties on pension schemes to transfer and consolidate eligible pots will be included in the forthcoming Pension Schemes Bill and are “likely to come into force from 2030”, but with a phased approach to implementation. An estimated 13 million deferred small pots would have been in scope at the end of 2024.
In his foreword, the pensions minister, Torsten Bell, argues that small pots are “plaguing” the workplace pensions market. He says that these proposals are just “the starting point” for consolidation and that they will provide “the foundations for consolidating greater numbers of larger pension pots”. This might suggest that the £1,000 trigger for automatic consolidation could quickly increase. There was an estimated £39bn in pots valued below £10,000 at the end of 2024, of which only £4bn was in sub-£1,000 pots.
As originally announced by the previous Government in November 2023, the central idea is that, where a small pot below a prescribed threshold (initially £1,000) has not received contributions for 12 months, members will be told that their pot will be automatically transferred to an authorised default consolidator unless they opt out.
Members who do not choose a consolidator will be allocated to whichever one they have the largest existing pot with. A carousel will be used where members have no existing relationship with any consolidator.
Any authorised consolidator will have to take any pots allocated to it; they will not be allowed only to consolidate pots associated with their own members.
The Government expects “significant interest” in becoming default consolidators from larger Master Trusts. It agrees in principle with the Delivery Group’s suggestions of additional criteria that could be added to the existing Master Trust authorisation regime; these include asset size, stronger protection of small pots from flat fees, and a Sharia fund option. There appears to be less appetite for using Group Personal Pensions as default consolidators, but legislation will keep the door open to this.
To facilitate automatic consolidation, the Government will establish a non-commercial Small Pots Data Platform (SPDP), to be funded via the General Levy. The SPDP is described as “a central hub to undertake data matching and identity verification on behalf of pension schemes”.
A Feasibility Review, to be led by the Pensions and Lifetime Savings Association, will consider how to deliver the policy (eg, whether the SPDP should hold records itself) and which areas of the Pensions Dashboard ecosystem could be replicated for the SPDP. This will report to DWP by June 2025, “informing decisions to support the passage of the Pension Schemes Bill”.
Members will receive two communications. The first, at the start of the process, will come from the ceding scheme and will explain what will happen by default and what options the member has. A further communication, from the receiving scheme, would follow when the transfer was complete. Communications will be in a prescribed standardised format, but with decisions on whether these are issued digitally or on paper left to providers. The SPDP will not issue communications.
Ceding schemes will send member information to the SPDP, which will then seek to match members to consolidators. Data standards will be established following consultation, with pension providers required to take reasonable steps to improve data. The Government is encouraging schemes to do this in advance of legal duties coming into effect, in particular by seeking to obtain members’ personal email addresses. It will explore new duties on employers to provide updated information where available.
Transfers would take place in bulk, with industry estimates suggesting that this could reduce costs by 50%-80%. Current transfer processes (and anticipated relaxations in respect of bulk transfers from contract-based schemes) will be used. It is proposed that schemes would have 12 months to complete transfers from when they identify eligible pots.
Current processes should be built upon to allow the Pensions Ombudsman to investigate complaints and disputes where members believe an error has been made. The General Levy will be the funder of last resort for redress where fault for an error lies with a scheme which no longer exists and where the pot is unrecoverable. Where the SPDP is at fault, “an alternative funding mechanism” will be needed.
The Government will consider the sequencing and interaction of small pots consolidation with the other pension reforms that have been announced and the outcomes of the ongoing Pensions Review. It intends in “the coming months” to “say more” about its expectations and will develop a roadmap to give industry and businesses “sufficient time” to prepare.
Once the Pension Schemes Bill is enacted, the Government will consult with industry on draft regulations during 2026.
Mr Bell told the House of Commons on 23 April that the timeline for Phase 2 of the Government’s pensions review, looking at adequacy, will be set out “shortly” (which may or may not mean that the review itself will get under way shortly).
