Commentators are all too ready to proclaim the previous 12 months a momentous year for whichever industry they happen to be writing about but for once, the pension industry need not be worried about being charged with hyperbole; 2015 – and April in particular – will be truly momentous.
This time last year, no one could have predicted the sweeping set of reforms announced by Chancellor George Osborne in his March Budget statement. In fact, the industry was looking forward to a relatively quiet 2015. Automatic enrolment had been introduced in 2012 and the next two years went by without many tears, although the real crunch point is still to come when millions of micro-employers hit their staging dates in 2016. Ahead of the Budget announcement, 2015 was set to be the calm before the storm.
But Osborne’s political masterstroke put paid to any plans for a relaxing year. From April, the Chancellor’s reforms will hand pension savers unprecedented freedom over how they use their pots once they reach the age of 55.
Not only has this sent pollsters into a frenzy trying to understand how people will behave when given unfettered access to their fund, but providers have had to redirect resources to serve an entirely new market. Insurers reliant on annuities were particularly badly hit by the reforms and this comes on top of the new 0.75 per cent cap on charges, also due in April.
Before Osborne’s “freedom and choice” reforms were unleashed, auto-enrolment’s progress was the key issue. The country’s largest employers began auto-enrolling staff in 2012 and 2013 while 2014 saw the SME market hit its staging dates.
As expected, The Pensions Regulator saw an increase in non-compliance as smaller firms struggled with their new duties. In October last year, TPR revealed it had served its first three £400 fines for non-compliance and issued 163 notices between July and September compared with just 14 between the start of auto-enrolment and July.
Despite the first signs employers may be feeling the pressure, the extension of auto-enrolment has so far been hailed a success. The real crunch comes at the end of this year and 2016 when hundreds of thousands of SMEs have to comply. Competition between providers at this end of the market is a growing concern and Money Marketing revealed how The People’s Pension and Now: Pensions could struggle to serve all employers without additional employer charges.
With the introduction of auto-enrolment, the damage wrought by fees and charges on the size of pension pots came under increasing scrutiny. From April, the default funds of schemes used for auto-enrolment will be subject to a 0.75 per cent cap on “member-borne” charges. Active member discounts and member-borne commissions will also be banned from April 2016.
However, a December audit of old, high-charging pension schemes found up to £26bn of pension assets still being charged at least 1 per cent. Pensions minister Steve Webb spoke of his shock at the findings and pledged to force providers to change. Shadow pensions minister Gregg McClymont has long argued for action. A Labour=commissioned consultation on retirement products is also considering a cap on drawdown funds.
But AllianceBernstein managing director pensions strategy group Tim Banks warns “any price cap has to stifle innovation”.
Banks adds introducing a cap on decumulation products would be entering “dangerous ground”.
Aviva head of pensions policy John Lawson says the audit should have looked more closely at why some members pay higher charges, including guaranteed investment returns or annuity rates.
From April, it will be the responsibility of the new independent governance committees to assess the value for money schemes provide members.
The weight of guidance
The risks introduced by the Budget reforms are clear. Given the option of cashing in their entire pension, entering drawdown arrangements and wary of annuities, will savers be left worse off in retirement as a result of the changes?
To avert this potential political disaster, the Government announced a free guidance service giving consumers information on their options face-to-face, delivered by Citizens Advice, over the phone with The Pensions Advisory Service or through a Treasury-designed website. It will be funded by a levy on financial services firms, including advisers. The final breakdown has not yet been confirmed.
In theory, savers will be guided away from the most damaging choices – such as taking too much cash from their pots and paying more tax than necessary – with advisers benefiting from new business from more complicated cases.
However, there are concerns take-up of the guidance will be low. In October, Money Marketing revealed a pilot conduct by Legal & General had just a 2.5 per cent take-up. Pica, a group of product providers, has led the campaign to introduce a “second line of defence” to catch people who shun guidance and advice. The idea is gaining political support and will be front-page news if enough evidence appears of people retiring with poor outcomes.
Hargreaves Lansdown head of pensions research Tom McPhail says: “While I support the freedoms, we’ve been missold a system in as much as the Government’s stock arguments about everyone getting guidance and a decent state pension just don’t stand up to scrutiny.”
Looming large behind everything is the general election. Barely a month after the freedom and choices reforms take effect, the country goes to the polls. Labour has given tacit approval of the direction of reforms and the timing leaves little leeway for any handy disaster stories to emerge.
However, Money Marketing did reveal how senior Labour party figures were drawing up plans to reverse some of the changes although any detail is unlikely to surface this side of May.
The key political pension figures may both be out of the picture by then. Unless there is another Tory/LibDem coalition, pensions minister Steve Webb may have to let go of the reins while Gregg McClymont’s own seat – Cumbernauld, Kilsyth and Kirkintilloch East – is under threat from a resurgent Scottish National Party.
Whatever the colour or combination of the next government, pensions will be tinkered with – a redistribution of tax relief is almost certainly on the cards. The vast scale of state spend in the area and the importance of the grey vote means, despite the protestations of the industry, change is here to stay.