As I have travelled around the country meeting with advisers over the course of 2017, without doubt the hottest topic has been the state of the DB-to-DC transfer market and the potential changes in regulations around advising on transfers. Another year of ‘lower for longer’ interest rates has helped to keep transfer values close to record levels.
The flexibilities offered by DC pensions plus relatively favourable treatment of death benefits have continued to make transfers an attractive option for some. At Royal London we are very keen to make sure that the right people transfer and the wrong people do not, and I am pleased that the Good with Your Money Guide, which we produced on ‘five good reasons to transfer’ and ‘five good reasons not to’, is widely used by advisers to explain the basics to clients.
In the summer we saw the FCA’s first thoughts on how to update the regulatory regime around transfer advice in light of pension freedoms. Since then, we have also seen a lot of enforcement action, with a particular focus on the interface between advisers and third-party transfer specialists.
The new advice framework will still start from the general assumption that transfers are not in a client’s interest but will expect advisers to start from a ‘neutral’ position in each case, which could be interesting. Information about the ‘value’ of a transfer quotation will have to be presented in pounds-and-pence terms as it is hoped that this will be easier for people to understand than percentages or critical yields.
But it is not just in the world of transfers that there has been a lot of activity. Automatic enrolment is near ‘the end of the beginning’. Most firms have now reached their staging date and attention is turning to how best to manage the process of stepping up contributions in April 2018 and April 2019. In November we published a policy paper jointly with pensions lawyers Eversheds Sutherland highlighting the need for employers to keep their AE schemes under regular review. Advisers will have a crucial role to play in supporting employers with this.
As I write, the 2017 review of automatic enrolment has just been published. As expected, the plan is to reduce the current starting age for enrolment from 22 to 18, and there is talk of making mandatory contributions apply to the whole of earnings and not just a band of ‘qualifying earnings’. Both of these would be welcome, though it is likely to be several years before either comes in to effect.
One ‘dog that didn’t bark’ was reform of pension tax relief, beyond the bizarre decision to go ahead with the cut in the Money Purchase Annual Allowance. In the 2017 Budget the chancellor found a way to borrow more without breaching his borrowing limits and as a result didn’t have to turn to politically challenging areas such as tax relief. But such tricks can only be pulled so many times, and it would be surprising if a look back at 2018 did not involve further tinkering on this front!