Make pension consolidation part of financial wellbeing - here's how

Employers have an important role to play when it comes to making pensions simpler and easier to manage for employees.

Small pension pots are back in the spotlight. The government has made consolidation a central feature of the Pension Schemes Bill, aiming to make pensions simpler to manage and better value for savers.

With around 13 million deferred small pots in the system and the number rising each year, action is overdue. But while reform is coming, the timelines mean savers may wait years to feel the benefits. Employers have an important role to play in closing the gap.

What the government is planning

The Pension Schemes Bill introduces a new system to bring together small, deferred pension pots worth £1,000 or less. Under the proposals, any defined contribution (DC) pot created under automatic enrolment, with no contributions for at least 12 months, will be transferred into an authorised “default consolidator” unless the saver opts out.

The aim is to cut unnecessary administration, reduce flat fee charges on multiple small pots and improve member engagement. The Department for Work and Pensions (DWP) estimates that automatic consolidation could boost outcomes by around £1,000 for the average saver.

However, these consolidators aren’t expected to be fully up and running until 2030.

Why this may not be enough

Although the reforms are welcome, the long lead in means change will be slow. Many savers changing jobs over the next five years will continue to accumulate multiple small pots.

That leaves them exposed to ongoing flat fee erosion, poorer investment outcomes and the practical challenge of keeping track of several providers.

There are also groups who could slip through the net, such as:

Pots above the initial £1,000 threshold will not be captured.
Savers with missing or inconsistent data may not be matched easily.
Those contributing to schemes outside automatic enrolment rules, or those with niche investment options, may not meet the criteria.

These risks widen the gap between well supported savers and those disengaged from their pensions. Fragmented savings make it harder to build a meaningful retirement income.

Smaller pots often attract proportionally higher charges and may be left in underperforming funds. All of this can contribute to the growing pensions adequacy crisis that many are facing. In turn, this could impact employers if their staff are unable to afford to retire when they plan to.

Consolidation offers clear advantages, but without proactive support the benefits will be uneven.

What employers can do now

While the industry builds the infrastructure needed for automatic consolidation, employers can take steps today to support their staff:

Make pension consolidation part of financial wellbeing programmes, using simple, jargon-free guidance to explain why combining pots can improve outcomes.
Use workplace communications to remind employees how many pots they may have built up and signpost reputable tools that help trace and consolidate savings.
Work with providers to offer targeted education at key life moments, such as onboarding or leaving the organisation.
Encourage employees to review their pension savings regularly more broadly to understand what pensions they have and what these might be worth.
Consider whether the scheme’s own design or provider could make consolidation easier, for example through clear online journeys or optional transfer support.

Employers do not need to wait for legislative deadlines to act. By helping employees understand the value of bringing their pensions together, employers can support better retirement outcomes for their staff at relatively minimal costs and reduce the long-term risks that members face from holding fragmented savings.

If you’d like to talk about how we can support your employees with clearer, more effective pension choices, please get in touch.