The sheer scale of changes to the UK (defined contribution) pensions environment that have been announced in 2014 was not foreseen at the start of the year. Some of the measures proposed during the year, such as the charges cap, followed from pre-existing processes. Other announcements caught most by surprise, particularly the freedoms set out in the Budget. The full force of many of these amendments will only be felt in 2015, as the announcements come into binding force, although changes in behaviour have already begun to emerge. The re-shaping of the environment is going to sweep some participants away but there is also opportunity for others to ride this massive wave to their advantage.
The change that has garnered most of the headlines was that of the freedoms announced in the Budget. These freedoms do not, however, change the fundamental issue faced when transitioning from saving to consuming those savings – how to turn accumulated pension savings into income provision through retirement. The freedoms did not eliminate the requirement to purchase an annuity at retirement – that change actually took place back in 1995! The fall-off in the volume of individual annuity sales and the share prices of many annuity providers post the announcement seemed to indicate that 19 years of reality sunk-in over a few short days. The recent publication of the latest round of the retirement income market study by the Financial Conduct Authority’s (“FCA”) was critical of many annuity providers. This criticism has added to these providers’ ‘annus horibilis’, making the Queen’s 1992 seem like a positive walk in the park for some.
Savers will be able, but not compelled, to access free (at the point of delivery), impartial guidance through the ‘Guidance Guarantee’ announced in the Budget. Further detail regarding this guidance has been announced subsequently, most recently in the FCA’s Guidance Guarantee Policy Statement. There are some outstanding issues to be addressed before The Pensions Advisory Service and the Citizens Advice Bureaux begin providing guidance telephonically and face-to-face respectively, in less than four months’ time.
The more significant changes, to my mind, followed shortly after the Budget in the form of the ‘Better workplace Pensions: Further measures for savers’ Command Paper. This Command Paper addressed issues related to governance and charges, both of which had been consulted on during 2013. The governance-related changes will manifest in the form of mandatory Independent Governance Committees (“IGCs”). The IGCs are intended to protect the interests of savers in contract-based arrangements from April 2015. These changes might well impact the composition of trustee boards in trust-based arrangements too. April 2015 will also see the introduction of the charges cap of 0.75% p.a. in the default option of Auto Enrolment Qualifying Workplace Pensions. There remains much work to do, beyond the yet to be finalised measures due to be implemented in April, around the issue of cost and fee disclosure within the pensions and wider investment industry.
The summer of 2014 brought the Queen’s Speech, containing the announcement of upcoming legislation around ‘defined ambition’ and risk-sharing/collective pension arrangements. The resulting Pension Schemes Bill is now making its way through the parliamentary process. The changes to the pensions landscape resulting from this Bill will likely only be felt from 2016 – so there is less urgency in this regard as far as 2015 is concerned.
Autumn saw further changes around the taxation of defined contribution pensions during decumulation and after death. Corresponding changes for the tax treatment of annuities on death were announced during the Autumn Statement. The net result of these changes, as well as those announced in the Budget, will be to increase the attractiveness of defined contribution pensions as a savings vehicle once the changes take effect in April 2015.
The level of activity in the UK pensions industry has not been confined to the changes set out above. There have been a number of consultations related to these, and other, issues too. The Independent Project Board is due to report back on its audit of charges and benefits in legacy defined contribution workplace pension schemes by year’s end too. All in all, it’s been a busy year! The shock waves unleashed in 2014 will reach land in 2015. Who will be swept away and who will be well-positioned to ride these forces to their advantage?
Season’s Greetings and all the best for the momentous year ahead.