Pensions minister Steve Webb is facing up to the most important year of his political career.
Unfortunately for the Liberal Democrat MP, his first task is likely to be convincing the pension industry that the delay to automatic enrolment for companies with fewer than 3,000 employees will not undermine the Department for Work and Pensions’ flagship reforms.
The Government confirmed in November last year that auto-enrolment would be pushed back until after the general election in May 2015, a move designed to alleviate financial pressures on small businesses.
Webb will confirm the new staging dates in early 2012, just months before the reforms start for the biggest employers in October. Industry experts warn the decision to shuffle small firms out of the auto-enrolment picture until after the next election leaves the door open for the next Government to exclude them altogether.
The Government-backed Nest pension scheme has become used to this level of uncertainty, having already had its 2012 plans disrupted while an independent review into auto-enrolment was carried out last year.
Nest chairman Lawrence Churchill told the work and pensions select committee there would be extra costs for the scheme in interest payments on its Government loan, meaning Nest’s ability to sell itself to employers and IFAs this year is even more critical as the scheme attempts to become self-sufficient.
The DWP will begin its auto-enrolment communication campaign in January 2012 after managing to prise £10m from the Treasury’s ever-tightening fist to promote the reforms. Unfortunately, £10m does not stretch very far, so the DWP has decided not to run a TV ad campaign. Ministers are instead planning to negotiate with broadcasters about running “TV partnership” initiatives in January, March, May, September and October. This could involve the Government paying a fee to have specific pension issues discussed on programmes.
Anecdotally, awareness of the reforms among people in their 20s and 30s is almost non-existent, so building a public understanding of how people will be affected by the changes will be a critical task for Government, employers and the pension industry this year.
Webb is also expected to bring forward final proposals for simplification of the state pension system in early 2012.
The reform, which was announced in April last year, has faced stumbling blocks as DWP and Treasury ministers attempt to address the thorny issue of contracting out while delivering the policy in a cost-neutral way.
One suggestion put forward by the Confederation of British Industry would allow pension schemes to reduce accruals to make up for higher National Insurance contributions paid by employers and employees if contracting out for defined-benefit pension schemes is abolished.
Introducing a single state pension payment of around £140 a week is only half the story. The Government will also outline details of plans to introduce an automatic link between life expectancy and the state pension age, having already put forward proposals to accelerate Labour’s planned increases to 67 and 68.
For Webb, delivering certainty on both auto-enrolment and the state pension next year – two reforms the minister sees as being intrinsically linked – will be crucial if he is to deliver on his value-for- money agenda.
The pension industry is also likely to maintain the pressure on the Treasury to provide some sort of easement for investors in capped drawdown.
Savers have faced severe cuts in the maximum income they can take each year through drawdown as a result of record low gilt yields, which are used to calculate the maximum income people can take from their fund each year.
Sipp provider AJ Bell has called for the Government to temporarily reinstate the 120 per cent GAD limit and initiate a review of the link between drawdown and gilts.
This request was initially rejected by Treasury financial secretary Mark Hoban but support for the campaign is growing and the issue has been covered extensively in the consumer press. Conservative MP Hoban will not want to be seen to be standing idly by if pensioners continue to see their spending power cut.
For those who choose to buy an annuity when they reach retirement age, 2012 should be the year when significant improvements to the process of shopping around are either delivered by the industry or forced on the industry by the Government.
The DWP-led open market option working group, whose members include representatives from the insurance industry and reform campaigners Pica, is expected to bring forward proposals designed to make it easier for people to shop around for a retirement income in the first quarter.
For Sipp providers, the most eagerly anticipated development for 2012 is undoubtedly the FSA’s paper on increasing capital adequacy requirements to safeguard pension investments.
When I first wrote that the regulator intended to increase cap-ad levels for Sipp firms in June last year from the current level of six weeks’ annual audited expenditure, it was suggested the FSA could increase the minimum to 13 weeks.
But FSA pension and investment policy manager Milton Cartwright told delegates at the Henry Stewart conference in November the regulator could raise cap-ad requirements to two years’ annual audited expenditure.
One Sipp provider I spoke to recently also expects the FSA to place more emphasis on the role of providers in ensuring “unsuitable” high-risk Sipp investments are not accepted into clients’ portfolios.
At the moment, the level of due diligence that Sipp firms carry out on investments varies from provider to provider.
More clarity on this issue is expected in an FSA consultation paper due to be published in the first quarter of 2012.