The UK government has announced a new policy aimed at helping workers keep track of their retirement savings by automatically consolidating small pension pots. The initiative was unveiled by Pensions Minister Torsten Bell on 24 April and will be introduced through the upcoming Pension Schemes Bill.
This reform addresses the growing problem of small, fragmented pension pots which are often created as people change jobs throughout their careers. At present, there are 13 million pension pots in the UK each worth £1,000 or less. This number continues to rise by approximately one million every year.
For workers, this creates unnecessary administrative hassle and can result in poorer returns due to multiple flat-rate fees. The current situation also leads to approximately £225 million in extra administrative costs for pension providers each year. The new scheme aims to reduce these costs by automatically moving individuals’ small pots into a single pension scheme that meets value-for-money criteria. Individuals will still be able to opt out of the scheme.
The reforms are designed to make pension savings easier to manage, reduce costs for savers and schemes and support economic growth. According to government estimates, the average earner could benefit from an increase of around £1,000 in their pension pot over time as a result of the changes.
Cutting costs for schemes and savers
Pensions Minister Torsten Bell said the initiative would simplify the pension process for workers and reduce inefficiencies across the industry.
“It’s great news that more people are saving for their retirement. But I want to make pension saving as simple and rewarding as possible. There are now more small pension pots in the UK than pensioners – raising costs and hassle for workers trying to track their savings. It also costs the pensions industry hundreds of millions of pounds every year,” he said.
“We will automatically bring together people’s small pots into one high-performing pension, reducing costs as well as hassle for savers. In time this could boost the pension of an average earner by around £1,000 as part of our Plan for Change to put more money in people’s pockets.”
As well as easing the burden on individual savers, the initiative is expected to reduce the administrative workload for businesses managing workplace pensions.
How the scheme will work
A Small Pots Data Platform will be established to help identify and match eligible pension pots for consolidation. To become a consolidator scheme, providers must meet specific criteria – including being part of an Automatic Enrolment qualifying scheme, demonstrating adequate scale and offering value for money. Additional member protections will also be introduced, including a clear opt-out process.
The upcoming Pension Schemes Bill will formalise these provisions in law and is scheduled to be introduced in Parliament later this spring. The bill is expected to include over 15 million people across the UK and could increase pension savings by up to £11,000 for some individuals, according to government projections.
Zoe Alexander, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association, welcomed the reforms.
“The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike. The PLSA has worked extensively with industry and the DWP to propose solutions and supports the model being proposed by the Government.
“We look forward to working on delivering the recommendations of the Small Pots Development Group and are pleased the Government is tackling this long-standing issue in the Pension Schemes Bill.”