Small pots, big plans: consultation on small pot consolidation

This briefing looks in detail at those plans, considers the potential impact and sets out next steps. This is relevant mainly to DC and hybrid schemes but it may also be of interest to employers because new employer information duties are proposed.

Background

There are currently around 13 million small deferred DC pots (worth under £1,000) in the UK. These are racking up an estimated £240 million in administration costs which ultimately fall on members to pay.  The number of pots is growing by over a million each year. The disproportionate cost and work involved in administering these small pots is an issue for schemes and members. 

Since the start of auto-enrolment, government and industry have been thinking about how to address this issue, with various consultations and working groups along the way. The initial “pot follows member” proposals were issued 15 years ago.

The proposed solution – a “multiple default consolidator” framework – is set out in broad terms in the Pension Schemes Act 2026 but much of the detail has been left to future regulations and guidance. This consultation sets out some of the proposed detail and seeks views on how to address a number of unresolved issues. 

What are the proposals?

From 2030, small defined benefit pots, worth £1,000 or less where no contributions (or member-initiated investment decisions) have been made for at least 12 months would be transferred without member action to a limited number of authorised small pot consolidator schemes (not to be confused with DB consolidators), if the member does not opt out.

Eligible scheme/pot features

What schemes/pots are covered? This applies to schemes that have been used for auto-enrolment. Pots in scope are described as those in DC charge capped default funds (where the member has not expressed an active investment choice) created since the introduction of auto-enrolment on 1 October 2012. Schemes with 100 members or fewer are likely to be exempt initially.

Will there be any timing exemptions? Schemes may be able to exempt pots from the 12 month dormancy rule temporarily where no contributions are received due to breaks such as extended parental leave, career breaks or working overseas.

Will there be any investment-related exemptions? Self-select investments chosen by the member and schemes established to meet specific religious or values-based requirements (such as the Plymouth Brethren scheme) will be excluded. This is because it would not be practical initially for consolidator schemes to cater for the full range of religious, ethical and specialist investment choices (including Sharia-compliant funds) and members who select their own investments are in many cases likely to be more engaged with their pensions. The government will give this more thought later.

What about pots with guarantees and special features? The proposal is that pots with special features such as guarantees, survivor benefits and rights linked to marriage/partnership will generally be excluded. However, schemes may at their discretion consolidate these if they consider that the benefits of consolidation would outweigh the special features. They would need to record the reasons why, tell the member and give them the right to opt in to consolidation.

What about pots with a protected pension age (PPA)? Some members may have the right to access a pot before the normal minimum pension age (currently 55, due to rise to 57 from 6 April 2028), known as a PPA. The intention is that pots with a PPA will not be excluded automatically from consolidation but schemes will have a discretion not to consolidate them where, for example, the PPA would be lost on transfer. Again, reasons would need to be recorded.

What about schemes that are winding up? Schemes will be exempt during a winding up period where the winding up commences before the small pots regulations come into force. 

Member communication

What will schemes have to tell members? In-scope schemes will have to issue a transfer notice for each eligible small pot. This must set out details about the pot (including any guarantees) and other information including the transfer proposal, process, the right to opt out and any alternative options including the right to choose a different consolidator to the default option. The plan is that communications will be clear, accessible and standardised. The receiving consolidator scheme will also need to send information to the member. 

How long will members have to opt out? The proposal is that members will have 30 days to respond, but this time limit (and a potential discretion to accept late opt-outs) will be subject to further consultation. 

Automatic transfer process

Schemes will have to identify eligible pots, determine where that pot should be consolidated, including whether a member already has a pot with a consolidator scheme, and then transfer the eligible pot to the appropriate destination. The process map in the consultation shows (at a high level) how this would work. 

Pot destination: The idea is that where a member already has a pension with a consolidator, the small pot should be transferred to the same consolidator. If they have more than one pension pot with a consolidator, the small pot should be transferred to the consolidator with their largest existing holding. Where a member does not already have a pension with a consolidator, there will be a “carousel” allocation mechanism to determine the destination consolidator scheme. 

Operating model: The government has concluded that a “federated” delivery model, underpinned by a central oversight body, will provide the most effective structure. This means, broadly, that schemes themselves would exchange data, match members to pots and consolidators and carry out transfers – but it would be done within a common framework of rules, standards and governance arrangements. 

Central oversight body: There would be a central oversight body serving two purposes: (1) to establish and maintain rules, operational requirements and standards (including data, messaging, matching and carousel allocation standards); and (2) to support the practical operation of the framework by enabling consistent interaction between participants. The government is seeking input on where this function should sit – e.g. should it be a public or an industry-led body? 

Messaging between schemes: There will need to be a consistent approach to messaging between schemes, including enquiries, confirming whether a match has been made, providing pot information, identifying the appropriate consolidator and initiating transfer activity. The government is interested in views on how this should work (e.g. potentially suitable existing messaging standards or infrastructure). 

Matching: A common framework will be put in place to match members with pots and consolidators. Rules will be needed around what happens when a match cannot be confirmed.  

Default consolidator schemes

Authorisation and governance: Specific requirements around structure, governance and scheme rules for consolidators will be set out in due course. For occupational schemes, it is envisaged that this will build on the existing master trust authorisation framework overseen by the Pensions Regulator (TPR). The the Financial Conduct Authority (FCA) will establish a separate framework for contract-based consolidators – this is expected to set equivalent standards. Key requirements are likely to include that the consolidator scheme must accept any eligible pot, be a qualifying auto-enrolment scheme, have a green “value for money” rating, preserve PPAs, consolidate multiple pots belonging to the same member and (to support a streamlined market) only offer one consolidator arrangement.  

Supervision and enforcement: The supervisory and enforcement regime (including what happens where a consolidator scheme fails to meet required standards) will be considered in due course.

Size: Minimum size rules are likely to be set, potentially linking to the £25 billion minimum that will apply to certain default arrangements from 2030.

Charging: The government is considering what sort of charging structure may be appropriate. It seems likely that the current prohibition on applying flat fees to auto-enrolment pots of £100 or less will be expanded and views are sought on how this should work. Otherwise, the government is not currently planning to introduce additional consolidator-specific charging restrictions.

Sharia-compliant funds: Small pot consolidators will eventually need to offer Sharia-compliant funds but this won’t be required during the initial implementation phase.

New employer information duties

Small pot consolidation will be a scheme-led process but the consultation includes proposals for new employer auto-enrolment duties designed to support the framework. 

The government says it will require employers to request personal email addresses from employees, pass them to schemes where provided and also update key member details (including name, date of birth, address and personal email) at least every 12 months. 

The consultation suggests that it is through the employers’ proposed new duties that information in relation to temporary absences such as career breaks and parental leave will be captured and shared to reduce the risk of unnecessary consolidation where pots appear dormant. 

Our thoughts

What may seem like a simple problem (too many uneconomic small pension pots) is in fact very complex to address. The current consultation is over 70 pages long but represents a major step on the road rather than a fully formed small pots consolidation process. 

Significant progress has been made but some key areas remain to be resolved – for example, the central oversight body has not been identified, the “carousel” allocation mechanism will need to be designed and the potential central digital interface is yet to be confirmed.

Questions remain about how much detail will be appropriate in small pot member communications and how best to present potentially complex information in a way that is accessible. As the consultation notes, “additional information may not in itself lead to better decisions”. 

Schemes will need to exchange member and pot information with a view to identifying whether a consolidator already holds a pot for a member and potentially what size that is. The challenge will be to create an effective and workable “data matching” process. Data matching has required careful consideration in a pensions dashboard context but the risks here are all the greater given it involves the automatic transfer of pension funds, generally without any member input. Significant difficulties could arise if incorrect transfers are made. 

The new proposed duty on employers to request and update employee details periodically would seem at first glance to be of limited benefit (employees are likely to have left the job at the point the pot becomes dormant). However, personal email addresses in particular tend to remain stable over time, so this information may well be of value for data matching purposes. 

The government’s aim to have this system operational by 2030 is ambitious considering how much remains to be finalised. However, the number of small pots is growing steadily so there is reason to move at pace.

Action points and next steps

DC schemes that have been used for auto-enrolment should monitor the progress of the government’s plans. They should factor in a potentially significant future increase in administration and communication workload. Data accuracy will be key to the successful implementation of this process – so focusing now on improving member data should help to smooth the process later. 

Some DC master trusts and pension providers may already be mulling over whether to offer a small pot consolidator. They should review the consultation and consider responding. It remains to be seen how many conclude that it will be financially and operationally viable to enter this new type of market. 

The consultation closes on 17 November 2026. A response and draft regulations are expected during spring 2027. A further consultation, planned for late 2027/early 2028, will consider the detailed requirements for transferring schemes, the supervisory approach, data standards and outstanding elements of the broader framework. TPR and the FCA will also consult in due course on the processes schemes will need to go through to act as a small pot consolidator. The government would like small pot consolidation to begin in 2030.