Government proposals to consolidate pensions worth £1,000 or less into authorised default consolidators from 2030 could be a “gamechanger” for employee savers.
In the government’s ‘Small pots delivery group report’, which set out the plans, pensions minister Torsten Bell said that enabling savers to maximise good retirement outcomes will only work if changes are made to make it easier to keep track of and consolidate pension pots over a working life.
The success of auto-enrolment means more people have a number of small pensions. Government data collected from providers shows that since 2020, the number of pensions worth less than £10,000 across the same five large providers has grown by around 7.2 million, from 10.9 million in 2020 to 18.1 million in 2024. Of this growth, 3 million was in pots worth less than £1,000, from 8.3 million to 11.2 million.
“As people change jobs they are enrolled into a new pension, often into a new pot – resulting in more and more small pots being created and making it harder to keep track of pension savings. I want to ensure savers are connected with these pots at retirement and that waste is reduced wherever possible,” the minister said.
“Our [Pension Schemes] Bill will ensure that we can address the growing issue of deferred small pots, and we will introduce a duty on schemes to enable the consolidation of over 13 million pension pots, starting at those that are worth £1,000 or less.”
The number of small pots in the system is “growing at a rate of knots and ultimately heightens the risk that people will lose track of their hard-earned savings”, said Gail Izat, managing director for workplace and retail intermediary at Standard Life, part of Phoenix Group.
She said: “The introduction of consolidators that can administer these pots effectively and invest them dynamically will be a step forward and when combined with pension dashboards will empower people to take control of their savings. We look forward to working with government on the creation of this new system and to working through the role of consolidators and what it entails.”
Pete Glancy, head of pensions policy at Scottish Widows, said the government’s proposals to consolidate small pots will help reduce industry operating costs and could lead to lower charges in the future for retirement savers.
“Reducing the number of smaller pots could also help boost engagement levels, with savers less likely to feel overwhelmed by the number of pots they have from previous employers,” he said.
Glancy said that higher levels of engagement should translate in the longer-term to better performance and improved decision making at the decumulation stage, which is when people begin drawing money from their pension.
But he added: “There’s still a lot of work to be done sifting through the technical aspects needed to make this work, which could take time, but we will continue to work with the government as it progresses.”
David Brooks, head of policy at Broadstone, said the government’s figures on the growing number of small pots “highlights the urgency of tackling this issue”.
“Consolidating small pots will make it simpler for savers to manage their pensions, especially in tandem with the pensions dashboard due to come on stream later this decade.”
Hargreaves Lansdown head of retirement analysis Helen Morrissey said: “Auto-enrolment has played an enormous part in getting more people saving but along the way it’s caused a big problem with small pots. There’s an estimated 13m pensions worth less than £1,000 washing around the system and this causes problems for people’s retirement planning.”
Morrissey said that the move to implement a “multiple default consolidator model”, now known as the Small Pots Data Platform, could prove to be “a real gamechanger”.
“In scooping up these pots the platform can reduce costs for providers and significantly improve outcomes for members.
“It’s easy to lose track of these small pots but over time they can grow and make a big impact on your overall retirement saving. Letting members know these small pots have been allocated to one provider reminds people about the existence of these important savings, gives them a better understanding of what they have and this can massively boost engagement.”
She said rigorous data and security standards would be needed and described the proposed deadline of 2030 for transfers to begin as “punchy”.
However, she emphasised that the government is looking at what can be replicated from other projects to improve efficiency and reduce cost. “One example is the industry’s experience of preparing for the pension dashboard which means the quality of member data has significantly improved,” she said.
Kate Smith, head of pensions at Aegon, also said that there’s still a lot of work to be done to determine the authorisation and supervisory framework, design, delivery and implementation of the small pots consolidation regime.
“The government intends to build on the master trust authorisation regime to enable master trusts to apply to become default consolidators. It’s expected the FCA will develop a regulatory framework for GPP providers,” Smith said.
“One key element is a feasibility review of the Small Pots Data Platform digital infrastructure, which will be led by the PLSA. Previously described as the ‘clearing house’, this is a critical component of the proposed small pots regime, as it will be responsible for data matching and verification, and identifying or allocating a default consolidator.
“The new duty on schemes to transfer small, deferred pots to authorised consolidators is due to be effective from 2030 and it’s likely this will then be phased in over a few years. We believe this is a reasonable timeframe given the other reforms the government intends to deliver including pension dashboards, the value for money framework, and its pension scale objectives. These will lead to scheme-level consolidation as well as having an impact on future authorised default consolidators, so need to be delivered first.”
