Financial advisers and the rest of the pension industry have faced two major challenges in 2011 – adjusting to fast-changing Government reforms and regulatory rules and navigating clients through an economy seemingly intent on punishing savers.
I have resisted the temptation to talk about 2011 as being a year of unprecedented change because most of the radical reforms are open to tinkering by policymakers and it appears nothing is safe.
The Government’s flagship automatic enrolment pension reforms have been pushed backed for firms with fewer than 50 employees until after the general election in May 2015. When I wrote a story on October 5, saying this was being considered, the Department for Work and Pensions told me it had already done enough to ease burdens for small businesses. Chancellor George Osborne disagreed.
Pensions minister Steve Webb (pictured) has played down the delay, claiming that keeping all firms under the scope of the reforms and starting auto-enrolment in October 2012 means the reforms will still work. The fear expressed by many in the industry is that the door has now been left open for the next Government to exclude small firms altogether.
The fact that we do not know what the final auto-enrolment staging dates for employers will be less than a year before its start date is incredible. When you consider that these reforms were first proposed by Lord Turner six years ago, it is borderline shambolic.
Despite the delay, Webb remains intent on pressing ahead with “Operation Big Fat Pension Pot”, a radical attempt to allow people to gather small pension pots in one place. Ministers believe this could be achieved either by automatically transferring orphan pension pots into a central aggregator fund – potentially Nest – or through legislative changes so people’s pension pot follows them from job to job.
The reform forms part of the minister’s “value for money” agenda, an attempt to ensure the pensions that millions of people are eventually auto-enrolled into are fit for purpose.
This agenda inevitably spilled into the murky area of charges in June this year, when Webb told delegates at the Association of British Insurers conference in London that the Government could reinstate the 1.5 per cent stakeholder cap if evidence emerges of savers being overcharged.
This was followed in October with a warning from The Pensions Regulator that it does not view active member discounts (or “deferred member penalties”) as either fair or acceptable. TPR executive director of defined-contribution June Mulroy subsequently claimed providers had used AMDs to rip off customers.
Liberal Democrat MP Webb is also engaged in a battle with Treasury ministers over his plans to introduce a universal flat-rate state pension for future retirees. The reform, which was announced to much fanfare in April and would see all future pensioners receive a state pension of around £140 a week, has not yet seen the light of day.
One former Labour heavyweight told me that delivering the proposal without incurring additional costs, as the Treasury has insisted, will be “impossible”.
One Webb idea that has received a definitive answer is allowing people to access their pension pot early. Unfortunately for Webb, the answer was no, although Treasury financial secretary Mark Hoban has committed to looking at ways to integrate pensions and Isas.
As part of this drive for greater flexibility in pensions, the Treasury proposed an extension to trivial commutation rules, allowing people over 60 to take up to two pots worth up to £2,000 as cash.
The move brings personal pension commutation rules into line with occupational pension rules and has been widely praised by advisers.
The Government’s reclassification of scheme pension as defined-benefit, on the other hand, has created more uncertainty for advisers and Sipp and SSAS providers.
In October, Money Marketing revealed that a Government amendment to the Pensions Bill clarifying the definition of a money-purchase scheme excluded scheme pension payments.
Standard Life has argued that the ruling could kill off scheme pension.
However, Sipp and SSAS provider trade body the Association of Member-directed Pension Schemes says the impact will be small because current DB funding regulations only apply to occupational pension schemes and exclude SSASs with fewer than 12 members.
The DWP has yet to clarify whether the reclassification was intended or accidental. As a result of the uncertainty, Dentons has susp ended the use of scheme pension on its Sipp and SSAS products.
The issue is all the more pertinent at a time when falling gilt yields and Government restrictions have squeezed the annual pension income a person can take through capped drawdown, which was introduced this year as part of reforms which abolish compulsory annuitisation at age 75. Scheme pension had previously been promoted as an attractive, flexible alternative to capped drawdown.
The changes to the rules mean anybody with secure annual pension income of £20,000 can do as they which with the rest of their pension fund through flexible drawdown.
For everybody else, there is capped drawdown, which allows people to draw from their pension pot up to a maximum set by the Government. This maximum was cut from 120 per cent of the equivalent GAD annuity rate to 100 per cent of GAD from April.
Unfortunately, this happened just as gilt yields, which are used to calculate people’s maximum incomes under capped drawdown, fell to a record low of 2.5 per cent.
Furthermore, the National Association of Pension Funds has warned that the Government’s quantitative easing programme – which reached a total of £275bn this year – will “torture” UK defined-benefit schemes as long-term interest rates are forced downwards.
Looking ahead to 2012, there is potential for significant progress in pensions. Auto-enrolment will definitely begin for the UK’s biggest employers, details of state pension simplification could be revealed and the Treasury’s Isa/pension integration plans should start to take shape.
But the Government’s continued drive for savings means further cutbacks, including a possible review of pension tax relief in the March Budget, will remain firmly on policymakers’ agendas.