Government action needed to stop and reverse the proliferation of millions of small pension pots

Private sector employees tend to get a new pension pot every time they change employer. This means people who work for many different employers over their career often end up with many different pension pots, some of which can be very small.

In 2023, there were an astonishing 12 million defined contribution (DC) pension pots worth under £1,000 which are no longer being contributed to (“deferred”). In aggregate, these contained almost £4 billion. These numbers have increased rapidly in recent years and will continue to grow further without policy action.

The proliferation of these small pension pots matters. It is costly for pension providers due to the fixed costs of administering a pension, leading to higher charges and lower returns for savers. And having savings spread over many small pension pots makes it easier for people to lose track of their savings, and harder to make sensible decisions on how to use their wealth through retirement.

The status quo is therefore not fit for purpose. Perhaps most ridiculously it often leads to some individuals having more than one pension pot with the same provider. 

That is a key conclusion of new research, published today as part of The Pensions Review, led by the Institute for Fiscal Studies in partnership with the abrdn Financial Fairness Trust. 

We consider the policy responses available to government and find: 
• There is a strong case for small, deferred pension pots to be consolidated by default, with people being given the option to opt out of this consolidation if they wish. This would reduce the stock of uneconomical pension pots, and it should make it easier for people to manage their savings. This could be done by automatically moving all the money in someone’s small deferred pension pots into either the scheme run by their current employer, or into one of a number of default funds. This would not increase the administrative burden on employers.
• There are merits of going further than just consolidating small pots, and moving towards a system where people end up with one, or only a very small number of, DC pension pots as they approach retirement. This would help people make good decisions on drawing their pension savings through retirement. There are several ways to achieve this, each with their own set of trade-offs and potential impacts on the DC market. The preferred policy will depend on the weight policymakers put on ensuring all individuals end up with a single pot as well as the government’s aims for the future structure of the DC market. For example a system where an individual’s past DC pots all, by default, move into their most recent pension pot – known as “pot follows member” – would have many advantages. 

Laurence O’Brien, a Research Economist at the Institute for Fiscal Studies and an author of the report, said:
“Automatic enrolment has been a huge success in getting more employees to save in a pension. However, without policy action, many will end up with their savings scattered across several small pots by the time they reach retirement. This status quo is not fit for purpose: it is uneconomical for pension providers, leading to higher charges for savers, and it makes it harder for individuals to make good decisions on how to use their savings.
Policymakers should help savers out by ensuring that, by default, their small, deferred pots are consolidated together. This would lead to lower average charges and make it easier for individuals to keep track of all their savings.  One potentially attractive option is for an individual’s pensions to be combined, by default, into their most recent pension. What is not attractive is the status quo that generates many millions of pensions worth under £1,000.” 

Mubin Haq, Chief Executive at abrdn Financial Fairness Trust, said:
“In recent years there has been a rapid rise in the number of small pension pots, this particularly affects lower earners and women. The new Pensions Dashboard will help many to keep track of their pensions, but it will not necessarily lead to consolidation of these pots. Further action is needed to reduce the complexity of managing small pension pots, which should result in gains for employees as well as providers.”

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