In all the commentary around “pot for life” and CDC it strikes me that a key proposal has been almost ignored.
The “small pots” proposals are more likely to be implemented and will certainly come before pot for life.
But what are the proposals, how will it work and what are the next steps?

Automatic consolidation of small pots

The fundamental proposals are relatively simple:

1. All Automatically Enrolled DC pensions of under £1000 in value that have had no contributions for 12 months will be automatically consolidated.
   
   There are issues to resolve on the edges of this such as maternity leave but the fundamentals are there.
   
   
2. The pots will be consolidated to a small number of schemes with Authorisation to be a consolidator. These will be chosen on the basis of value for money, internal consolidation, engagement and scale. They must also be a valid AE scheme and not have flat fees. Mastertrust and contract based schemes will be considered.
   
   This is where it gets interesting. The suggestion doing the rounds is that we are talking 5/6 schemes here. Somebody is going to be disappointed. We can just take it as read that NEST will be one of the schemes.
   
   
3. Pots will be assigned to schemes on a basis of:
   a. Into an authorised scheme in which they already have a pensions pot.
   b. If they have pensions with more than one scheme, it goes to the larger existing pot.
   c. If they do not have a pot with one of the schemes it will be assigned randomly. Each scheme will get the same proportion of these pots.
   
   The real conversation here is about stage c. Originally the proposal was based on market share which seemed even more controversial. Looking at it purely from an implementation point of view this is where we need a clearing house (see below)

Making it work

The conclusion has already been made that a clearing house of some kind will be needed to make this work. But what will it actually need to do?

The proposed model is a “push” model. On a regular basis workplace schemes will have to check their book of business to identify pots that meet the criteria. (see above) Not particularly difficult I would say. Is it under a grand, have there been any payments in 12 months, is the person identified in some way as being exempt?

It’s the next step that’s difficult. Identifying which of the authorised consolidation schemes to send it to. Firms currently don’t know anything about where a member’s other pots might be.
That’s where the clearing house comes in.

It provides answers to the key questions. Does “Ian Macintyre” have a pot with one of the authorised consolidators? Which one has a bigger pot? What is the specific policy number for that pot? Who should it go to, marked as brand new, if he doesn’t have one?

Sounds to me like this is where we could piggyback the functionality and connectivity of the Pensions Dashboard. But that’s just me.

The interesting other question is would we also use the clearing house to send the details to the consolidator and even send the money?

I would suggest we should certainly consider it. If we can build the whole system as automated from the start then we can bypass the issues we currently have with pensions transfers. A subject I have ranted about before in this blog.

What’s next?

The DWP have made it clear that they now want the industry to get on with developing along the lines of the proposals above. They have made the decision to go with default consolidators and seem to have little interest in continuing the discussion on alternatives like pot follows member or a single consolidator (i.e. NEST)

On this basis they are proposing the creation of an Industry Delivery Group to look at the details and create concrete proposals for delivery. This will be created in the new year and will have to submit provisional proposals quite quickly.

Yes. I would like to be a member of the delivery group. I think an independent view will be important amongst the entrenched interests.

There is also the suggestion that they will go to parliament before the end of this government to put the necessary regulations in place. Personally, I think that’s a bit of a pipe dream.

More realistically I see that the desire is to have concrete proposals that can be handed to the incoming minister to enact in the next parliament. Small pots is not as politically controversial as “pot for life” and I could see a Labour government continuing with it.

In summary the big policy decision on small pots seems to have been made and now we start the much more complicated process of actually delivering it.