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A year in pensions: Industry in the dock over charges and annuities

The reforming zeal of pensions minister Steve Webb and his opposite number Gregg McClymont has driven another year of rapid change and uncertainty for advisers and providers.

2013 began with the publication of a historic (and much delayed) Government white paper detailing plans to replace the current means-tested state pension system with a flat-rate, single-tier payment worth £144 a week for future retirees.

The policy was not without problems, however. The Government was criticised over plans to allow people who had contracted-out of the state second pension, many of whom are public sector defined-benefit scheme members, to retain the benefits they have already accrued through contracting-out.

These people will also be able to continue to build up their state pension entitlement until they reach £144 a week under the new system.

In contrast, those who remained contracted-in and were expecting to benefit from the additional state pension will only receive the new rate of £144 a week, as will new pension savers who never had the opportunity to contract-out.

Experts estimated those who had contracted-in would be £20bn worse off as a result.

Hargreaves Lansdown head of pensions research Tom McPhail says: “The treatment of those who had contracted-out was clearly a fudge aimed at placating the public sector.”

Auto-enrolment

This year also saw a swathe of large employers automatic-ally enrolling their employees into a workplace pension for the first time.

According to the Department for Work and Pensions, opt-out rates for the first six months of auto-enrolment were just 9 per cent, well below previous estimates.

But Nest, the pension scheme set up by the Government, has had a more difficult beginning.

In July, chairman Lawrence Churchill revealed Nest had been forced to undertake a “root and branch” review of its systems after it fell victim to a £1.4m fraud.

Consultancy charging

Following the successful implementation of auto-enrolment in October 2012, the Government turned its guns on pension providers and advisers.

Webb announced a ban on consultancy charging for auto-enrolment from 10 May 2013, forcing many advisers and insurers to rip up their business plans for corporate clients.

The Government is also considering applying the ban retrospectively.

Syndaxi Chartered Financial Planners managing director Robert Reid says: “The sheer logic that you cannot charge people for something they are not getting was impossible to escape but the regulator and the DWP did not cover themselves in glory with their handling of the situation.

“Any insurer or adviser who built their business model around consultancy charging will have been left with a huge mess to clear up.”

OFT report and pension charge cap

In September, a damning report from the Office of Fair Trading identified £30bn of savings held in old, high-charging schemes and £10bn sitting in small trust-based schemes.

While the OFT stopped short of proposing an outright cap on workplace pension charges, the Government did not.

In October, the DWP set out three possible annual management charge caps for auto-enrolment default funds – 0.75 per cent, 1 per cent or a two-tier “comply or explain” cap.

Under the final option, employers would have access to a cap of 1 per cent but would need to justify a charge of above 0.75 per cent to The Pensions Regulator.

The Government wants the cap in place from April 2014 for new schemes, while schemes set up between October 2012 and March 2014 would be given a year to
transition.

However, the Association of British Insurers is pushing for a three-year transition to limit potential disruption to auto-enrolment.

Scottish Life managing director Ewan Smith says: “It is absolutely essential that auto-enrolment is successfully delivered and it is essential the market is efficient and competitive.

“The industry will need time to implement the OFT’s recommendations, which did not include a charge cap.”

Policymakers are also considering banning active member discounts and in-built adviser commissions from auto-enrolment schemes. Aviva head of policy John Lawson has warned this could see the reforms “grind to a halt”.

Annuity failings

In January, the FSA launched a thematic review into annuities, focusing on pricing and shopping around, with the results published early next year. Meanwhile last week the Financial Services Consumer Panel raised concerns about the behaviour of some non-advised annuity brokers.

Investment Sense marketing and relationship manager Phillip Bray says: “There are some serious problems with the current non-advised market and this is only going to become a bigger issue next year.”

It says something about how hectic 2013 has been that we do not have space to cover the Government’s “defined ambition” consultation, pension liberation or the implications of Scottish independence in this review.

At a glance – the biggest pension stories of 2013:

  • January: Pensions minister Steve Webb confirms the Government will introduce a £144 a week single tier state pension for future retirees  
  • January: FSA launches a thematic review into the annuities market, focusing on annuity pricing and shopping around at retirement
  • May: Government confirms it will ban consultancy charging for auto-enrolment and is considering capping pension charges
  • July: Nest falls victim to £1.4m fraud
  • September: OFT workplace pensions report concludes the market is not competitive and heaps pressure on pensions industry over legacy charges, transparency, active member discounts and adviser commission
  • October: Government proposes capping charges for auto-enrolment default funds.
  • Policymakers are also considering banning AMDs and in-built adviser commission.

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