On small pots, he estimated there are 12mn pots worth less than £1,000, meaning there are 8mn problematic pots on top of the micro pots already identified.
“I asked a number of master trusts how much they think the realistic expected minimum output cost is — the lowest estimate I had from any of the master trusts was still over £10 per year per member, and some of them are considerably higher than that,” Cheseldine continued.
He suggested that losses amounted to around £80mn a year, increasing at around 15 per cent, or £12mn, a year, and he predicted that losses could amount to £670mn in the next four years, rising to more than £1bn by the end of the decade.
“I’m not blaming the providers. They’re not racketeering, they’re not actually even making a profit [...] it’s only going to get worse for the providers in the short term,” he said.
An automatic solution?
Rob O’Carroll, head of automatic enrolment policy at the Department for Work and Pensions, confirmed that Alex Burghart — who was confirmed on the same day as minister for pensions and growth at the DWP — had been briefed on the small pots issue.
The department remained focused on ensuring that people auto-enrolled by their employer into a DC scheme “are getting the best possible value from their savings, because that will provide the best retirement outcomes for them”, O’Carroll said.
He agreed that, absent action to solve the issue, deferred members in particular will face “opportunity costs”, impacting their quality of life in retirement, while providers and the industry at large are likewise shouldering mounting costs.
“There is cross-subsidy going on here, because those members with larger pots are effectively cross-subsidising those with small pots, so they are not getting the best value out of this either,” he said.
O’Carroll cited three main areas where the industry has made progress, the first of these being dashboards, which he said had the potential to help tackle the small pots problem, not least for the benefits it will provide for member engagement.
He also mentioned member exchange pilots, which “provide an opportunity to link up deferred pots with active pots and consolidate”.
Finally, he suggested that the DWP was keen to see the emergence of “some sort of automated transfer and product consolidation system”, targeted at those who are not engaged with pension saving and enabling them to consolidate regardless.
