The government should clamp down on the “ridiculous” proliferation of small pension pots, a leading think tank has said.
The growing number of these small-scale funds puts up costs for pension providers and makes it more difficult for savers to make sensible decisions, the Institute for Fiscal Studies (IFS) argued.
“Further action is needed to reduce the complexity of managing small pension pots, which should result in gains for employees as well as providers,” Mubin Haq, chief executive at abrdn Financial Fairness Trust, said.
Most private-sector employees get a a new pension pot every time they change employer, which means people can end up with many different pots over the course of a career.
According to research from the IFS, last year there were 12.1m defined contribution (DC) pension pots which held less than £1,000 and which were no longer receiving contributions.
In aggregate, these pots hold over £4bn. The IFS pointed out that some savers “ridiculously” have different pots with the same provider.
“These numbers have increased rapidly in recent years and will continue to grow further without policy action,” researchers at the think tank wrote. “The status quo is not fit for purpose”.
The IFS said there was a “strong case” for ‘deferred’ pension pots – funds which are no longer being contributed to – to be consolidated by default.
“This would reduce the stock of uneconomical pension pots, and it should make it easier for people to manage their savings,” it said.
But the think tank also suggested there was a case to go further and move towards a system where people end up with just one DC pension pot as they approach retirement.
One way this could be achieved is through a so-called ‘pot follows member’ approach, where an individual’s past savings move by default into their most recent pension pot.
“Without policy action, many will end up with their savings scattered across several small pots by the time they reach retirement,” Laurence O’Brien, a Research Economist at the IFS warned.