March CPD Newsbrief – Pensions and retirement planning
Cap on pensions charges postponed
Any alteration to the cap on charges for auto-enrolled pensions will now be deferred until at least April 2015, the Government has announced. It has decided after consultation that employers should have at least a year to prepare for any change.
The planned delay follows an excoriating report by the Regulatory Policy Committee on the Government’s impact assessment and rumours of disagreement between the Treasury and the Department for Work and Pensions about the level of the cap.
Regardless of whether or not the criticism is the reason for the deadline change, Steve Webb is clear that this is just a deferral of the charge cap–not a change of policy. A cap of between 0.75% and 1% a year for those automatically enrolled into default funds is still a likely eventuality. The cap may be introduced along with a ban on ‘active member discounts,’ where charges increase when an employee stops contributing, and the outlawing of commission payments, which are still made for many schemes set up before 2013.
We face a period of uncertainty until the Government finally makes a firm announcement about the charge cap. This uncertainty includes the extent to which a cap will apply to all qualifying pension schemes, covering employees who have been members for many years, and automatic enrolment schemes. This presents a particular difficulty for employers who are currently willing to continue making contributions to an existing individual pension plan because it removes the requirement to automatically enrol the individual member.
Advisers should ensure (as far as possible) that charges on new pension arrangements are within the cap, which could mean avoiding active member discounts. The availability of NEST and other schemes at around 0.5% could make a charge as high as 0.75% a year on a new scheme difficult to justify, unless there were significant additional member benefits.
Advisers can probably postpone formal reviews of existing arrangements until the cap’s details are announced, but they should bear in mind the direction of travel. In a written ministerial statement published 24 February, pensions minister Steve Webb confirmed that the Government will introduce new measures requiring transaction charges in pension schemes to be disclosed.
Equity release market rides the updraft
In January 2014, the Equity Release Council (ERC) reported that 2013 saw the fastest growth in the equity release market for five years and the largest average loans for 15 years. This is good news for specialist advisers, but could there be an emerging risk as more homeowners look to improve their later life living standards through equity release (ER)?
The use of ER products also has growing support from consumer groups and politicians, and it has received positive references in numerous Government reports. However, ER has had its share of bad publicity in the past, though it has been looked at more favourably since the adoption of industry standards set by Safe Home Income Plans (SHIP), the ERC’s predecessor.
The average customer released £56,917 in 2013, more than in any year since 1998. 66% of customers in 2013 opted for regular income through drawdown products, while 34% chose lump-sum payments. Sales through independent advisers accounted for over £1 billion of loans for the first time, with 97% of customers using this route. The ERC reported that there were more than 10,000 new ER customers in the second half of 2013, with over £1 billion in housing wealth released in 2013 for the first time in five years, representing market growth of 36% since 2011.
While this last statistic is very encouraging, and in most cases will be referring to retail investment advisers, the current regulatory requirements do permit an individual to recommend an ER product without being qualified or able to discuss a customer’s pension, investments or savings.
ER is a means of decumulation and there is a strong case for requiring that advice should only be provided by specialists who can advise holistically. Perhaps now is the time for a review of the standards.
Pensions Bill may introduce controversial CDC schemes
The UK government is reconsidering whether collective defined contribution schemes (CDCs), which operate in the Netherlands, can work over here.
CDCs are very large defined contribution schemes, usually spread across an industry, that share risk between different cohorts of members. They work by pooling money in a collective account, and independent trustees deciding the investment strategy rather than the member.
Fans argue these enormous schemes deliver economies of scale, open up investment opportunities, and because of the longer-term horizon allow risk to be taken on much more efficiently, meaning less volatility and bigger pensions for members.
But critics argue there is a risk they will over-promise and under-deliver. Although the scheme will have the ability to cut back pensions in payment or even claim back pensions already, it will be the younger members of the scheme who will be holding up the promises made to the older (and often retired) members. And last year 66 Dutch schemes were forced to cut benefits because of funding deficits.
As the discussions continue, it’s unknown whether UK employers have the appetite for CDCs, and whether they can deliver all the benefits their fans promise.
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