The number of small pension pots — and the costs of administering them — will continue to increase, despite efforts from the government and industry, a Pensions and Lifetime Savings Association panel has warned.
There have been warnings that the proliferation of small pots could damage the financial sustainability of master trusts, and the credibility of auto-enrolment as a whole.
Moves were made to ban the charging of flat fees and move to a universal charging structure, despite some resistance from industry players.
A pilot member exchange trial that would have enabled trustees to move members between schemes was scuppered by changes to the normal minimum pension age, while the broader push towards pot consolidation has yet to see a preferred model emerge.
A growing issue
Speaking at the PLSA annual conference, Pensions Policy Institute deputy director Sarah Luheshi cited figures from a 2018 PPI study that suggested the number of small pots could rise to 27mn by 2035, compounded by the fact that people on average work 11 jobs in their lifetime, creating the potential for 10 more pots, which she said was “quite dangerous”.
The 2018 survey suggested there was more than £19bn in lost pots, “and that’s a scary number”, she said, with the average pot size being £12,000.
The PPI is shortly to publish an updated estimate of these numbers. Though not drawn on the specifics, Luheshi said: “It’s gone up, no surprises there,” adding that women and ethnic minorities tended to be disproportionately impacted.
She said that the PPI is currently working on a data project with five master trusts, the aim of which is ultimately to be able to extract data from those five master trusts and use it to build profiles of different members, the type and size of pension pots they have, enabling analysis that could better clarify the nature and scale of the problem.
Speaking on the same panel, Capital Cranfield professional trustee Andy Cheseldine, who is also chair of the Small Pots Co-ordination Group, said that the small pots problem was really a series of problems with no single solution, and “they sort of form kind of a complex adaptive system”.
He advanced member exchange as a partial, short-term solution, but cautioned that costs would only spiral as the wait for a long-term legislative fix continues.
To illustrate the scale of the problem, Cheseldine estimated that there are now more than 4mn “micro-pots” of under £100, which poses two problems: members struggle to keep track of them, while providers suffer the cost burden, thanks to legislation.
“[The Pensions Regulator’s] general levy for this year is 72p per annum per member. That’s the minimum; the larger schemes pay more. In addition, you pay the Fraud Compensation Fund levy of 60p,” he explained.
“Taking 4mn micro-pots, the maximum charge providers can charge is 75bps, most of them charge a lot less. So the minimum loss on each of those pots is 57p per member, per year, 4mn times. That’s before they do anything— they don’t do any admin, before investing costs, admin costs, communication costs.”
