The Department for Work and Pensions (DWP) has initiated a consultation regarding a new system designed to automatically consolidate small workplace pension pots. The government aims to have this scheme operational by 2030.
Currently, there are more than 13 million workplace pension pots valued under £1,000, collectively holding over £4 billion in retirement savings. An additional 1 million such pots are created annually. The DWP's initial proposals focus on inactive defined contribution pension pots, created since automatic enrolment began on 1 October 2012, that are worth £1,000 or less and held in a charge-capped default fund.
Under the proposed framework, individuals will receive notifications before their pension is moved and will have the option to opt out completely. They can also choose an alternative consolidator if they do not wish to use the government's default scheme. Safeguards will include a formal authorisation process for Default Consolidator schemes to ensure value for money and prevent placement in underperforming funds, as well as exemptions for pots with specific features like a protected pension age.
The government estimates that around 20 million pension pots could fall within the scope of the scheme once it is officially implemented in 2030. The DWP proposes a hybrid model where individual pension companies retain data but communicate directly, using details such as National Insurance numbers for verification. This automatic process is projected to save the pension industry approximately £240 million annually in administration costs.
Employers will be required to provide accurate employee data to pension providers to facilitate the identification and consolidation of previous pension pots into current schemes. The rules are intended to integrate with existing auto-enrolment duties and be digital to minimise administrative burden.