Pension reform is continuing at a relentless pace but can the industry keep up? Helen Morrissey reports
It has been six months since the Coalition government came to power and the relentless progress in pension policy has yet to slow. Over recent months, announcements have been made regarding state pension, pensions tax relief, default retirement age, auto- enrolment and changes to how pension increases are to be calculated. The interim Hutton report suggested far reaching changes to public sector pensions and a consultation on annuitisation has been completed. The pensions industry, financial advisers and scheme managers have a challenging time ahead interpreting what these changes mean for them while also bracing themselves for more change to come.
Tying the industry in knots
While many of the changes have been welcomed by the industry as bringing much needed clarity, it is also fair to say that we are still waiting for much of the detail as to how these changes will work in practice. As a result, concerns remain as to whether these reforms will succeed in finally simplifying the pension industry or tying it up in knots for years to come.
“I think it’s too early to say if all of these changes fit together in a cohesive fashion but I will say the government has hit the ground running,” says AWD Chase de Vere’s technical director, Param Basi. “They have done a lot to tackle the mistakes of the last administration but they have been blighted by cost issues – however, I’m quietly positive about how things are progressing. I’m pleased they have addressed a lot of the key issues and moving away from anti forestalling which was turning people away from pensions. We will see what happens when the Hutton report is published next year.”
One reform that has been warmly welcomed is the decision to proceed with auto-enrolment. When pensions minister Steve Webb announced the process would be put on hold while a thorough review was carried out, there were concerns that the project could either be significantly curtailed or else derailed completely. The decision to proceed has been welcomed with relief by many in the industry.
“It’s been a difficult time for the pension industry as we’ve had a lot of planning blight as we waited for decisions to be made on NEST. There’s still a lot of detail to be crunched through but the government’s decision to move forward with auto-enrolment and NEST was significant,” says National Association of Pension Funds chief executive Joanne Segars. “We were always confident that NEST would go ahead as we had gone a long way down the path to creating it, but we were concerned that there could be some shrinkage in the number of people who could be auto-enrolled.”
Another change that proved popular with the industry was the change made to pension tax relief. Annual allowances were decreased from £255,000 to £50,000 with a three-year carry forward put in place. Lifetime allowances were also slashed from £1.8m to £1.5m. While on the face of it reductions in these allowances may not appear to be good news, PricewaterhouseCooper’s pensions partner and chief actuary, Raj Mody believes they are a welcome simplification to the rules that were previously in place.
The devil is in the detail
“The new regime is significantly more welcome than that of the Labour government,” he says. “They [the Coalition government] managed expectations very well in that they slashed the annual allowance yet people welcomed it.
However, my concern is in the detail rather than the design. For instance if the annual allowance is not increased over the next four or five years then it may not look so generous once you’ve allowed for inflation. We need to look at what happens next. I can also understand why they slashed the lifetime allowance but they need to be careful not to repeat the complex protection regime that came out of A-Day.”
So it would seem that the changes in theory are good news for an industry which has been mired in complexity. However, while changes have been announced we are still waiting for the finer details on how many of these policies will work and this is causing concern according to Mody. “If you look at the change from RPI to CPI when calculating pension increases the details are again far from clear and that’s a concern,” he says. “Is it a practical approach or will it conflict with the protection of people’s accrued rights for instance? On the one hand it is welcome that the government took early steps to address this issue, but the following detail has yet to come through so people cannot work on it. There is also something to be said of the view that by going down this route you are taking something away from the benefit expectations of members. That is an understandable concern. If they had re-engineered how RPI was calculated then there would have been less of an outcry. However, they picked an explicitly different measure that looks and feels different to people.”
Capacity to cope
The industry is very much caught in the middle of knowing that changes are coming but as yet lacking the detail to be able to do anything about them. However, as the reform schedule continues to move forward quickly will the government be able to cope with its own workload? The next big project to be tackled is the announcement of the results of the consultation into annuity reform.
When the consultation process began in the summer it was expected that changes would come into effect in 2011. However, as we come to the end of November has the government left enough time or will the changes need to be shelved for a year? Prudential’s head of pension development Vince Smith-Hughes thinks this is likely to be the case.
“My concern regarding the rules on drawdown is whether the government will rush things through too quickly,” he says. “Also, when we look at the proposed minimum income requirement (MIR) for flexible drawdown it’s a very complex issue and I wouldn’t want to see it rushed through. Maybe we should pause for breath and make sure we proceed in the right way. I think we might see some slippage with the MIR being postponed for a year but the rest of the Age 75 changes seem to be very straightforward so could come forward next year as planned.”
Scottish Widows’ head of pensions market development Ian Naismith agrees: “I would be surprised if the government didn’t put it back to 2012 as I don’t see how it can be feasible for 2011. At the moment I feel the pace of change is a bit too much. Advisers tend to be on top of the key issues but it will take time to get to grips with the details.”
One reason for this potential bottleneck according to Segars is that the different changes are being handled by different government departments who work to their own timetables.
“We just need to make sure that everything is sequenced properly as all these changes are being dealt with by different government departments and there is a tendency for them to work in silos and not be fully aware of changes coming through from other departments,” she says.
There is also a concern that this bottleneck of work will also affect scheme managers and advisers who will struggle to cope with the regulatory demands being placed on them.
“We are at risk of exhausting the industry’s capacity to deal with these changes,” says Mody. “Company agendas aren’t dictated by regulatory change – they have a day job to do. In totality there are a lot of issues out there to be dealt with, and we run the risk that companies will be so overloaded that they take the easy decision rather than the right one.”
So it would seem that the UK pension industry faces a challenging time ahead as it gets to grip with the relentless pace of change and it is far from clear whether the reforms will be a success.
“We are seeing more cohesion than there was before with annuitisation and tax allowances becoming more straightforward,” says Scottish Widows’ Naismith.
“There has for instance been some joined up thinking with regards to changes to default retirement age as well as state pension age. However, there is still complication and we are nowhere near the end of the changes.”
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