Financial advisers and the rest of the pensions industry have faced up to another year of political and regulatory tinkering, set against the backdrop of a stagnating economy and an inflationary environment which continues to erode savings.
At the centre of much of the debate has been automatic enrolment. The Government’s flagship reforms finally got under way in October this year, starting with the UK’s biggest employers and working its way down to the smallest firms by 2018.
It has been far from a smooth ride, however. Following the Department for Work and Pensions’ decision to shift the staging date for employers with fewer than 50 employees to after the general election – a move which gives the next Government the chance to exclude them altogether – Labour waded in, warning high pension charges risked undermining the reforms.
In July, Ed Miliband told a press lunch in Westminster the party was determined to tackle the “massive, massive issue” of pension charges. The Labour leader subsequently called for a 1 per cent cap on charges.
Miliband’s intervention drew the ire of the pensions industry. Association of British Insurers director general Otto Thoreson accused him of “scaremongering”, while advisers warned that price caps are “blunt instruments” which have failed in the past.
Hargreaves Lansdown head of advice Danny Cox says: “These sort of interventions from politicians really aren’t helpful.
“The market is already pushing down costs and charges for investors, so moving towards a strict price cap should not be necessary.”
Once the storm had calmed, senior figures within the insurance industry accepted that Labour had, albeit bluntly and with some fairly significant factual errors, highlighted an important issue.
The ABI subsequently pledged to review the scale of the problem of exit fees on old pension policies and, in an attempt to get on the front foot in the debate, set out a four point plan to make charges more transparent.
At the National Association of Pension Funds conference in Liverpool in October, pensions minister Steve Webb said he would “name and shame” any provider who does not put in place safeguards to prevent employers using high charge legacy schemes for auto-enrolment.
Providers responded, with Aviva pledging not to auto-enrol anyone into an inappropriate scheme with high charges and Standard Life pledged to review the suitability of its old schemes.
Legal & General pensions strategy director Adrian Boulding says: “This will be an issue for some people but we do not have high charging schemes so we do not think it will be a problem for us.
“If there was a situation where we felt an adviser charge is not good value for the employees, we would take the adviser to one side and say it is not appropriate to use an L&G platform in that way. But frankly I do not see that situation materialising.”
Consultancy charging confusion
This year has also seen consultancy charging, a concept devised by the FSA in June 2009 to allow corporate advisers to charge a fee for their services from members’ pension pots, descend into chaos.
In June this year, the FSA published a newsletter saying it would not be acceptable for a consultancy charge to reduce the value of an individual’s pension contribution below the automatic enrolment legislative minimum. This created concern among providers and advisers that small and medium-sized businesses unwilling to pay an upfront fee would
not access advice ahead of their auto-enrolment staging date.
Syndaxi Chartered Financial Planners managing director Robert Reid says: “The way the FSA and the Government have dealt with consultancy charging has been an absolute joke.
“This should all have been sorted out years ago, but instead they have waited until the last minute and advisers have been hung out to dry.”
To rub salt into the wound, in November the pensions minister wrote to the Association of British Insurers demanding evidence about the way consultancy charges are being structured and warning they could be banned for auto-enrolment.
In a letter to the trade body, Webb said: “I am increasingly concerned about the way consultancy charges might interact with automatic enrolment. They should only be deducted from an individual’s pot where there is a tangible benefit to that individual.
“My officials are ready to carry out an urgent review of policy and practice in this area.
“Once I am in possession of the facts, I shall be able to decide whether or not to permit consultancy charges to be levied on automatic enrolment schemes.”
The last minute nature of the minister’s intervention has left some advisers’ business plans in disarray.
Richard Jacobs Pension and Trustee Services managing director Richard Jacobs says: “It is disgraceful that the Government decided to make this announcement at the 11th hour.
“We have put a lot of energy and resource into preparing our business to provide advice to small employers about auto-enrolment, but without consultancy charging it just won’t happen.
“We have not spoken to a single small employer who is willing to pay an upfront fee for advice.
“If these businesses cannot access advice then I believe auto-enrolment will fail, because the rules are incredibly complicated and they will need the support of an adviser.”
Aegon head of regulatory strategy Steven Cameron says: “The level of uncertainty around consultancy this close to the RDR deadline certainly isn’t helpful.
“We are concerned that the phrase ‘auto-enrolment scheme’ is being used for everyone, when in fact some employers will pay above the minimum.
“It would not make sense for the DWP to say an employer paying far more than the statutory minimum is not allowed to pay an adviser charge out of those excess contributions.”
As if 11th hour consultancy charging confusion was not enough, George Osborne used his Autumn Statement on 5 December to deliver another round major changes to pensions tax and drawdown.
The chancellor announced a cut in the annual allowance for tax-free pension contributions from £50,000 to £40,000, while the lifetime allowance was reduced from £1.5m to £1.25m.
It is the second time the Chancellor has cut the annual and lifetime allowances since becoming Chancellor in May 2010. In April 2011, the yearly cap on tax-privileged contributions was reduced from £255,000 to £50,000. A year later, the lifetime allowance was cut from £1.8m to £1.5m.
The new changes, which will not come into force until 2014/15, will lead to more complexity for investors and their advisers as the Government devises another set of protection rules for people who are close to the existing £1.5m limit.
A J Bell says individuals will be able to apply for a new form of fixed protection from summer 2013 after the legislation has come into force.
For defined-contribution savers who apply for the new fixed protection, no further pension contributions will be allowed from 6 April 2014, while defined-benefit members will need to stop building up benefits from this date.
Investors will be able to apply for fixed protection if they do not already have one of the existing forms of protection.
The Government will also consult on a new “personalised protection regime” which would cover those with pension pots valued at more than £1.25m on 6 April 2014.
A J Bell says this version of protection will allow people to continue paying contributions into their pension.
Forty Two Wealth Management partner Alan Dick says: “Protection is clearly necessary because otherwise some people will lose out.
“But the problem is complexity, which is inevitable. The risk is that as the Government adds layer upon layer of complexity, people just won’t understand and will give up on saving altogether.”
Osborne also bowed to industry pressure on capped drawdown limits, increasing the maximum amount a person can take as income from 100 per cent of the equivalent GAD annuity rate to 120 per cent.
However, policymakers have not yet committed to the more fundamental review of the way drawdown limits are calculated some in the industry have been calling for.
A J Bell marketing director Billy Mackay says: “Reinstating the 120 per cent GAD limit is a positive provided it is only seen as a short-term measure.
“If this is the long-term solution and the Government will retain the link between income and gilts, that would not be as satisfactory outcome as far as we are concerned.”
So it’s been another year of chopping and changing in the pensions industry in 2012 – and expect more of the same next year.
The Government’s long-awaited state pension reforms should be set out, although questions still remain about how and when a new flat-rate benefit for future retirees will be introduced.
Pensions minister Steve Webb also remains intent on improving transfers through his “pot follows member” reforms and “reinvigorating occupational pension provision, meaning advisers are unlikely to be granted the stability many crave as they head into the brave new world of the RDR.