By David Brooks, Technical Director, Broadstone
The auto-enrolment review did an excellent job of pushing some of the hardest decisions around how the policy is set up for the future down the road for a few years. With the all purveying influence of Brexit the Government does not appear to have the energy to confront the hardest challenge in pensions, namely saving in pensions.
Auto-enrolment is a success, if measured by the level it has increased pensions saving by the masses, but it is at a cross roads. If left to drift it could massively undermine confidence in pensions at a time when the Government relies on it more than ever for the future welfare of citizens. Defined Benefit provision is in its death throes (in the private sector – it endures in the public sector) and state pensions are being set up to be a later life cover and reduced. Increasing the age of access to state pension benefit is the right thing to do. I prefer to see it as an old age pension and older age is increasing all the time. However, the level of income it provides is low and supplementing this with proper private pension provision is the challenge that defined contribution pensions is singularly failing to address.
The Government is effectively hoping at least one of two things will happen. Firstly, that people are able to defer their gratification and save generously into their pension. Secondly, the employer is paternalistic enough to pay more into their schemes for staff. However, everyone knows that for the vast majority this is not happening. Few people pay more than the scheme permits and employers’ contributions are derisory when compared to those paid by employers within Defined Benefit schemes. Many people are also starting far too late and so will struggle to make up for the lost years of minimal (or non-existent) pensions savings with years of inadequate savings.
The fear is growing that auto-enrolment, which is providing a pension for the masses, will fail to meet the expectations of members when they reach retirement age (whatever that means anymore). This will shatter a fragile confidence in pensions right when we need pensions more than ever.
This is a relatively quiet time for pensions just at the point when it should not be.
I would like to see the Government begin an evidence gathering and consultation exercise to understand how we can solve our pension savings crisis. Let’s air the woes of pensions and start getting them sorted out. Some headings could be:
• Simplicity and transparency
• Guidance and advice (even education although a simple and transparent system shouldn’t need too much of that)
• How and when to convert to long term income
• Incentives to contribute
• Understanding the position of the state pension
Effective from 6 April 2018
Ok when I said it was a quiet time for pensions it isn’t really. We’ve got the forthcomings from the DB White Paper (and the work and pensions select committee’s inquiry into it). The regulators are also feverishly trying to get a grip on things with pronouncements on funding, master trust authorisation and 21st century trusteeship (from TPR) and coping with the fallout from the explosion of DB to DC transfers (FCA) and how TPR and the FCA can work better together.
Is the Government guilty of ball watching (to use a horrible football analogy), focussing on the wrong things and unwilling to put their heads where it could hurt?
There are a number of initiatives that came into force on 6 April 2018 summarised below:
• Introduction of “deferred debt arrangement” for multi-employer DB schemes
• Advice on DB transfers needed, from required if best estimate basis is £30,000 or more, if the actual transfer value is more generous.
• New DC costs disclosures (reviews to Chairman statements needed)
• Bulk transfers without member consent for DC benefits – simplified with advice
• Smoothing of rules for bulk transfers of contracted-out rights
Not effective - yet
While I am summarising some of the things that are happening lets quickly look at some of the ideas that are either not quite or not all. Some of these are closer than others.
Pot follows member, seems be an idea destined to return, but not quite yet. Questions in Parliament would suggest that this (and the secondary annuity market) are both dead. My sense is that we have not heard the last of pot follows member. The stumbling block remains that the providers not willing to engage with it. They may (and should) have their hand forced.
The on/off/on of a pensions cold calling ban that is too difficult…until it is drafted is a good example of legislators getting it completely wrong and then being forced to get it right. We all know some of the scammers will work to get round it, but why make their lives easy and why not make it easier to punish them and raise the profile of their underhand methods? More needs to be done to protect people from themselves and from scammers but less legislation is not the answer.
The pensions dashboard continues to limp along. Although, as could have been predicted, the DWP are not fully committing to the 2019 deadline (thanks to Jo Cumbo for tweeting this). We await the feasibility study due anytime know.
Pensions tax relief – I think that’s enough for now.
Quiet time for pensions? Not really.
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