The Department for Work and Pensions has said it will work to encourage consolidation to solve the problem of small pension pots rather than pursue the "pot follows member" approach.
But pensions minister Laura Trott said the longer-term solution to this issue would be to move to an Australian-style "pot for life" system.
In a consultation paper, published today (July 11), DWP first set out the feedback it received to the call for evidence on small pots which ran between January 30 and March 27, 2023.
The DWP’s consultation looked at addressing the growth of deferred small pots in the automatic enrolment workplace pensions market.
In its response, the DWP said "pot follows member" risked situations where a saver would take a pension from a well-performing scheme into a poor-performing one when they moved jobs.
The DWP also concluded that due to the frequency of transfers likely required as part of a pot follows member approach this would require their scheme to become more liquid and reduce their capacity to invest in illiquid assets.
Instead the DWP opted for the multiple default consolidator approach.
It said: "We have concluded that the multiple default consolidator model is the optimum approach to addressing the deferred small pots challenge and has the potential to provide greater net benefits to members, ensuring that members eligible deferred pots are consolidated into one scheme.
"We recognise that this approach will not eliminate the future flow of deferred small pots. However, this approach will result in a significant reduction in the current stock of deferred small pots, whilst also enabling the consolidation of future deferred small pots created."
DWP said that to stop the creation of new deferred small pots, a more fundamental change to the automatic enrolment framework may be needed.
In the future, a simpler system of ‘stapling’, as seen in Australia - where the members active pension pot is assigned as their pot for life, unless they actively choose an alternative provider - may emerge.
Pensions minister Laura Trott said: "In the longer-term, a simpler system of workplace pension saving could emerge to deal with the fundamental issue that new pension pots are created each time someone starts a new job, for example, a lifetime provider model with each saver stapled to a ‘pot for life’, which may go further to solving this for existing and future pots.
"However, it is right we focus now on delivering this solution to the small pots issue we face as no matter what the future of workplace pension saving holds it is essential deferred small pots are consolidated to the benefit of schemes and most importantly members."
The previous call for evidence explored whether priority should be given to addressing the stock or flow of deferred small pots first.
There was no clear consensus about whether either should be prioritised.
But respondents noted that neither a default consolidator nor pot follows member approach would truly eliminate the flow of deferred pots as the pots would have to sit deferred for a period of time before becoming eligible for consolidation.
