The last five years have seen pension schemes and individual pension savers having to cope with an unprecedented amount of change. With the fallout from political uncertainty, along with a second new UK Pensions Minister in two years, what does 2017 have in store?
Matthew Arends, partner at Aon Hewitt, said: "From talking to clients, some key hopes and fears emerge for 2017. First, there is a real and widely-held desire for some stability in pensions. Pension schemes have found themselves running to stand still, so now is the time for the Government to bring back some certainty. This will enable trustees, employers and, most importantly, members to plan effectively.
"However, this hope for a lack of change is under threat as the Treasury eyes the billions spent on tax relief on pension contributions. The fear is that it might prove to be an irresistible temptation to switch the basis of tax relief so that pension contributions are paid out of taxed income but then are tax exempt in roll-up and in retirement – the so-called TEE (or ISA) model. Our clients have told us that this would undermine the trust that the population has in workplace pensions."
Matthew Arends continued: "If further change is required, we favour a flat rate of tax relief for all savers – and re-expressing this as an incentive to save. We believe this will help foster a more positive impression of saving for retirement. We also hope - if there are to be tax changes - that the Chancellor will respond to industry calls and abolish the Lifetime Allowance - which unfairly penalises DC fund growth - as well as returning to a uniform Annual Allowance of £40,000 for everyone.
“In conjunction with flat rate tax relief, such a model can appropriately control the cost to the Treasury of pensions tax relief at the same time as retaining the highly effective core pensions savings model we have had for years."
Cyber risk threats
Matthew Arends said: "2017 will be seen as the year that cyber risk entered everyone's consciousness in the context of pensions. Some pension schemes are already addressing this area but my hope is that all schemes will now consider their cyber risks as part of their overall risk management processes.
“Companies already invest significantly in controlling their cyber risk exposure, spending $2bn a year worldwide on premiums for cyber risk insurance. With pension schemes being such large repositories of member data including bank account details, they too need to be as thorough as companies in managing these risks."
Governance concerns
Matthew Arends said: "The Pension Protection Fund's Purple Book tells us that there are over 2,000 pension schemes with fewer than 100 lives and with asset sizes averaging less than £7m. These are the schemes most likely to find it difficult to muster the governance resources and low cost investment management that their much larger counterparts enjoy.
“We support the Pensions and Lifetime Savings Association’s Defined Benefit (DB)Taskforce in focusing on the efficiency of running these schemes and we would not be surprised if the Department for Work and Pensions’ Green Paper looking at the future of DB does not make some reference to this, possibly in the context of consolidating these schemes. But we see that as a tough aspiration to fulfil without resorting to buying out the liabilities. However, we are optimistic that the approaches do exist to help bring significant efficiency gains without consolidation."
Continued uncertainty
Matthew Arends concluded: "Overall, our forecast for 2017 is sadly one of continued uncertainty for pension schemes brought about by the effect of an unpredictable political environment on economies, leading to uncertain market conditions. In the face of all of this, we can only repeat our call for a halt to continual legislative change to pensions."
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