Urgent reform is needed to ensure individuals can manage their retirement savings more effectively.

The IFS report identifies small ‘deferred’ pension pots as a major issue in the UK’s pension landscape. Nearly 20 million defined contribution (DC) pension pots worth under £10,000 are no longer being contributed to, with 12.1 million of these containing less than £1,000 (‘micro pots’). Such fragmentation complicates retirement planning for savers and increases administrative costs across the pensions industry.

This growing issue not only creates unnecessary complexity for individuals but also results in higher costs across the pensions sector and for consumers. With millions of small pension pots sitting dormant, it is clear that reform is necessary to ensure savers can effectively manage their retirement savings.

One of the key solutions to this issue is small pot consolidation, particularly for micro pots. Consolidation simplifies pension management, reduces the risk of lost pots, reduces fees and improves investment outcomes.

Research from PensionBee shows that nearly one in five UK adults feels certain or believes they have lost a pension pot, equating to approximately 8.8 million individuals. By making consolidation the default for micro pots, savers can regain control of their retirement savings, reducing the likelihood of lost pensions and improving retirement outcomes.

The default consolidator approach and role of the pensions dashboard

An effective pension consolidation strategy relies on the successful implementation of the pensions dashboard infrastructure. Once fully operational, the dashboard will allow savers to view their pension pots online all in one place, making engagement more likely and consolidation and decumulation much easier.

At present, small pot consolidation using a ‘default consolidator’ approach (which would automatically move micro pots to a suitable default pension provider), would be more effectively delivered using the proposed pensions dashboard architecture. This adds further urgency to the timetable for dashboard delivery.

In the meantime, savers can take proactive steps by reviewing their existing pensions, finding paperwork and tracking down lost pots through past employers, and consolidating where appropriate to reduce complexity and simplify retirement.

While small pot consolidation is an essential next step, long-term reform should aim to create a system where savers can maintain a single pension throughout their working lives. The ‘lifetime provider’ model, which offers the consumer choice, would prevent the proliferation of pension pots in the first place, and reduce the need for repeated consolidation, providing individuals with a more stable, simple and cost-effective retirement savings path.

The priority for policymakers must be to simplify pensions, reduce costs, and improve retirement outcomes. Small pot consolidation is a key first step, but broader structural reform will be needed to build a system that truly works for savers and prioritises their interests in the long run.

With small pension pots causing unnecessary confusion and inefficiencies, the call for action is clear.

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