February CPD Newsbrief – Pensions and retirement planning
More criticism of the annuity market
The Financial Services Consumer Panel (FSCP) has criticised the workings of the annuity market.
Shortly before Christmas, the FSCP waded into the debate about annuities. It had undertaken a year-long study, which included a review of literature going all the way back to 2002, and commissioned three pieces of new research examining consumers’ annuity purchasing experience; the adequacy of annuity quotation and purchase websites; and experts’ views on market developments. All this work produced three sets of recommendations:
1. The FCA should:
- Embody in its rulebook and mandatory standards the equivalent of a code of conduct for the non-advised/execution-only market, an area which caused great concern to the FSCP. It wants to see an emphasis on “the need for high professional standards, the transparent disclosure of charges, and a clear explanation of the implications of non-advice for consumer protection.”
- Address the causes of the “current regulatory arbitrage,” in which execution-only services are expanding at the expense of the professional advice market. The FSCP noted that “advice … is rarely offered for pots of less than £100,000, unless the customer has other investible assets or a pre-existing relationship with the adviser.”
- Undertake a “rigorous market study”, part of which would examine “the possible exploitative pricing of annuities sold by insurance companies to their DC customers who have saved with them for a pension.”
- Strengthen the operation of the Open Market Option. For example, this would require the use of best practice underwriting of enhanced annuity quotations.
2. The Money Advice Service should develop an annuity adviser website and require member firms to adhere to the code of conduct.
3. The Government should require employers and trustees to establish a non-advice service for members of workplace schemes, which adheres to the proposed code of conduct.
This report produced a few ‘annuity shock-horror’ headlines, but the Government seems to be thinking in other ways – in particular, Mr Webb’s latest brainstorming on transferable annuities.
Auto-enrolment roll-out gathers momentum
The Department for Work and Pensions (DWP) recently published its Automatic Enrolment Evaluation Report 2013, which draws together and summarises existing research data from a range of sources so as to evaluate the impact of auto-enrolment since its implementation in October 2012.
The key points are:
Opt-outs: The report found that 9% of workers chose to leave within the opt out period, and the proportion of workers choosing to leave the scheme after the opt-out period closed was typically around one-fifth of the original opt-out rate.
Employee awareness and attitudes: A survey carried out by DWP in July 2013 found that overall employee awareness of auto-enrolment remained high at 82%. The survey also found that nearly 73% of those surveyed had positive feelings towards automatic enrolment.
Employer awareness and understanding: Most employers were aware of and understood their automatic enrolment duties, although the percentage of employers stating they understood what was required of them has fallen from 100% to only 85% of employers staging in November 2013 and 91% due to stage in January 2014.
Costs impact and challenges faced by employers: The highest costs identified by employers were for external legal advice and running communication campaigns. The key implementation challenges identified by large employers were establishing effective data systems, categorising and assessing workers and communicating the changes to workers.
Scheme choice: In deciding on which pension scheme to use for automatic enrolment, the majority of employers stayed with their current provider and many simply used one of their existing schemes for automatic enrolment.
Pension participation: DWP research estimates that overall participation in a workplace pension has increased from 61% to 83% as a result of automatic enrolment.
It is, however, worth pointing out that we have yet to see smaller employers reach their staging dates. How this skews the final outcome remains to be seen.
Delay on pensions charge cap confirmed
Pensions minister Steve Webb has confirmed the auto-enrolment charge cap and ban on active member discounts will be delayed until April 2015.
Mr Webb said the Government needs to “think carefully” about transition arrangements for pre-2015 schemes. He also confirmed any ban on AMDs would also be delayed and that “nothing changes” this April.
“There was a view in the consultation responses that changing the rules within 12 weeks of an employer’s staging date didn’t quite stack up. So the changes we make will apply to firms who stage from April 2015.”
However, in a written ministerial statement Mr Webb said a charge cap “will not be introduced before April 2015”:
“We remain strongly minded to cap pension scheme charges in the default funds used for automatic enrolment. However, we have consistently encouraged firms to start getting ready for automatic enrolment twelve months ahead of the time the new employer duties apply to them.
Therefore, to give those employers at least twelve months notice of the rules that will apply to them; I can confirm that any cap on charges will not be introduced before April 2015.”
It remains unclear at what level the Government plans to set the charge cap or whether transaction costs will be included. The DWP has proposed three possible charge caps – 0.75%, 1% or a two-tier “comply or explain” model.
The DWP assessment of the impact of a pension charge cap was branded “not fit for purpose” by the Regulatory Policy Committee because it fails to clearly show the affect it will have on pension providers.
Another bonus to being a baby-boomer
Intergenerational wealth has come under the economists’ microscope.
The question of generational wealth is creeping up the political agenda as electoral demographics force drive politicians to shelter pensioners from spending cuts. Against this background, the Institute for Fiscal Studies’ (IFS) latest report examining relative wealth of the generations born between the 1940s and 1970s has some interesting insights:
- Over the last 10 years, inflation-adjusted growth in incomes of working age households has been virtually zero, compared with a 1.5% average annual real growth across the preceding 28 years. The cohorts born in the 1960s and 1970s have thus not seen the rapid rise in income between the ages of 30 and 50 that their predecessors (including the baby boomers) did.
- The 1960s and 1970s cohorts will be the ones that experience the downside of the single-tier pension. They will find that when they eventually reach state pension age (in roughly the 2030s and 2040s) their (single-tier) state pension will replace a lower proportion of their final earnings than did the combination of basic and SERPS/S2P for earlier generations.
- 66% of those born between 1970 and 1976 owned a home by age 35, compared with 71% of the 1950s and 1960s cohorts. The homeownership rate among the 1970s cohort appears to have stalled at around two thirds, against 80% for the 1940s and 1950s cohorts. The average age of the first time buyer has risen by five years since the 1960s and the second-time buyer, by 15 years (to age 42).
- The proportion of the younger groups who expect to receive an inheritance is much greater than for older groups who have done (or will do) so. The IFS notes that, “Inheritances look like the major potential reason why the later economic position of cohorts born in the 1960s and 1970s could yet turn out better than that of their predecessors, on average.”
The idea that inheritances will come the rescue is an interesting one, not least because of the sums involved. However, there are already economists arguing that higher estate taxes are worth examining.
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