The next 12 months should have been the high water mark for the pensions industry. In theory, the revolutionary changes introduced in April 2015 will have been bedded in, while from 2016 the new state pension is set to drastically simplify retirement planning.
But what began as small grits in the oyster of the Government’s liberalisation programme have turned into painful sores. Savers are still struggling to access their pots while scammers are enjoying easy pickings from over-55s’ cash windfalls. And a once-in-a-generation consultation on the pension tax relief system has stalled product innovation as providers face another fundamental market shift.
The regulator’s capital adequacy regime for Sipp providers will also finally take effect in September. It seems certain some providers will exit the market or drastically cut back the assets they permit, with the impact on charges unknown.
Consumers have been blocked from using the freedoms by hurried rules that have led to providers restricting pension transfers. In addition, trust-based schemes and closed-book providers have been reluctant to upgrade systems to cater for the new flexibilities.
At the same time scammers who previously focused on “liberating” pension funds before normal retirement ages have been handed a golden opportunity.
Now funds can be accessed legally from the age of 55, savers are being lured into high-risk, unregulated investments without the protection of providers or trustees.
Figures from the City of London police show £9.1m-worth of scams were reported between April and August 2015, up from £4.5m in 2014.
Standard Life head of pensions strategy Jamie Jenkins says: “There’s been a switch of emphasis of scams from liberating money pre-55 to enticing people into investment scams post-55. The enigma is we don’t really know the extent to which that’s happened, much will have happened beyond the realm of providers to do anything about it. My concern is there’s a problem bubbling under the surface before people realise they’ve lost their money.”
If the Government does not halt the stream of money being taken out of the system and into the pockets of scammers, the freedom policy in its current form will be under threat.
While the Government is making progress working through the unintended consequences of the reforms – such as how to value guaranteed annuity rates – the future of tax relief looms large over the industry.
Whether the Treasury opts for a switch to the taxed-exempt-exempt model and Isa-style pensions or – the industry favourite – flat-rate of up front relief, the impact of any change will be enormous.
Providers fear the end of upfront relief will see pension saving plummet as well as requiring a costly dual system to deal with savings caught under the old model.
Initially disregarded by many commentators as a dangerous crackpot idea, the Government has shown no signs of ruling out a switch to TEE.
Cicero executive chairman Iain Anderson says: “The chances of Jeremy Corbyn ending up in Downing Street are very slim, but what he is doing is pushing the Chancellor and he has responded with some quite consumerist approaches to policy which can be quite challenging for the sector.
“And part of the reason why they are considering the switch to TEE is that you can wrap that up in the same sentiments.”
The Labour party’s response to the freedoms has been muted at best and negligent at worse. However, a report commissioned by Rachel Reeves, due to be published in the first quarter of 2016 by the Pensions Institute, is likely to set a more combative stance on the reforms and pensions policy more broadly.
While tax relief reform will inevitably dominate headlines in 2016, the success or failure of the Government’s flagship automatic enrolment policy hinges on how small employers react to the reforms.
Major providers, including Now: Pensions and The People’s Pension, will introduce employer charges this year to pay for improved services for small firms.
Now: Pensions director of policy Adrian Boulding says early signs suggest small businesses will engage with auto-enrolment.
He says: “Auto-enrolment will stand or fall on whether small emp-loyers support the policy. The experience to date suggests small firms are supportive and are encouraging their staff to put some money away to pay for their retirement. Employer attitude is critical and we will have to wait and see how that pans out as the reforms are extended.”
Boulding also expects debate around the scope of the reforms to heat up this year, with about five million people, including the self-employed and low earners, so far excluded from auto-enrolment.
He says: “I expect debate will bubble beneath the surface this year ahead of the auto-enrolment review in 2017/18.”
Death of the Sipp
Capital adequacy rules based on assets under administration and the proportion of standard and non-standard assets held by Sipp providers will finally be in force in September.
The regulator seems unlikely to issue any more guidance, leaving providers to argue over how key assets such as commercial property should be classified.
AJ Bell head of technical resources Gareth James says: “The practical impact of the rules is likely to raise its own questions. Can we expect some providers to increase charges to cope or will any firms restrict investment to the FCA’s standard asset list to manage the financial requirement?”
He also warns the potential for inconsistency of reporting may not lead to the greater consumer protection the FCA wants.
What is more certain is the inc-reased costs of compliance will lead some providers to sell up or close to new business. In addition, as firms shun more esoteric investments, the appeal of investing in a Sipp may rapidly fade.
In the firing line
Advisers will also have to deal with a deluge of new rules this year. Although likely to eventually be swept away by tax relief reform, the annual allowance taper for people earning over £150,000 hits in April.
In addition the Government’s plans to develop a secondary annuities market continue apace, with confirmation consumers will be required to take advice before selling though the threshold has yet to be set.
The unrelenting pace of regulatory change and continued use of pensions as a political plaything will inevitably lead to renewed calls for a permanent independent pensions commission.
Logically creating a body to take the politics out of pensions seems sensible. However, the chances of politicians signing away their right to dip into a lucrative honey pot are slim. More importantly, stripping elected representatives of their power in favour of an unelected commission will be difficult to justify.
The political rolling stone that won’t gather moss
Each Parliament seems to have a new “pensions settlement” but the last one was a total land grab for the Chancellor. Budget 2014 proved a game changer for George Osborne personally and politically. So why let the dust settle, especially with the media continuing to show voters trapped in old pension plans.
Ideas for scrapping higher rate relief have abounded since Labour’s time in office. It might have made some real political sense for them but the 1997 raid on pension funds as the first act of Gordon Brown hit him hard. Maintaining higher rate relief was a better pill to swallow than scrapping compulsory annuitisation.
This Chancellor’s political calculus is to continue to roll. That is why he set in train the pensions review in his first Tory-only Budget last year. Ideas and papers which he had considered back in 2008 and 2009 while in opposition – like TEE – are back on the table.
Freedom and choice are very difficult arguments to repel – and so it proved for Labour in the election. A Jeremy Corbyn-led Labour party will mount the arguments for pensions for the common good – but there is little political traction right now. And let us not forget a new retirement savings settlement is also likely to be a multi-billion- pound bonanza for the public finances. Freedom and choice and an improved public balance sheet – politically what’s not to like?
Whether its set to be flat-rate relief around 30 per cent for all savers or TEE, one thing is clear – in March the status quo is not an option anymore.
Iain Anderson is executive chairman of Cicero
Claire Walsh, chartered financial planner, Aspect8
Pension tax relief reform, which now seems inevitable, will be revolutionary and is likely to shape the debate for 2016. Ultimately the Government needs to encourage people to save and the idea of creating a two-for-one incentive looks attractive from an engagement point of view. The lifetime allowance should also be looked at and potentially scrapped because it is complex to administer and punishes people who are trying to do the right thing.