All smiles in the City but are there storm clouds overhead?

Insurers have long benefited from Government pension policy in building up their funds under management. Lobbying from the ABI has led to the establishment of personal pensions which have been used not just as a means of accumulating wealth but of stripping DB plans through transfers – lately transfers boosted by the prudential funding against member liabilities. Insurers have also grabbed the lion’s share of those choosing to opt-out of Serps/S2P. Most recently , they have benefited from the successful implementation of auto-enrolment. But all this is not enough, the ABI are now calling for 20 further reforms to further boost the profitability of its members.

 

There is no roadmap for the next chapter of AE, despite 5 years having passed since its last significant review.  This report suggests such a plan, and what changes we think need to happen to build on the success of the policy.

The proposals are designed to increase overall flows to insurers but reduce the number of small unprofitable pots. They argue for financial inclusion where those saving provide a profitable revenue stream but suggest exclusion of the poorest most financially vulnerable.

There is a debate to be had on whether those who are financially insecure should remain in pensions saving

First the fluffy stuff

Back in  2014 when the OFT reported 

The ABI managed to deflect the OFT’s criticism of insurers by encouraging IGCs to become consumer champions. Value for Money was to be used to help employers and savers make better choices. But, having staved off the threat of punitive measures from Government , they are now happy to consign IGCs and Trustees to a fiduciary backwater.

Detailed, technical documents such as Chair’s statements and Independent Governance Committee reports benefit from
independent professional scrutiny; their primary aim should not be to attempt to use them to engage customers, as there are other tools at industry’s disposal to deliver that.

Just what role the ABI see trustees and IGCs playing in DC governance isn’t clear.

What is clear is that the ABI’s view of the consumer journey is long on saving and short on spending. Considering the ageing of those who have been enrolled, it’s odd the proposed consumer journey looks no different going forward than it does today.

There is nothing in this consumer journey about “pensions”, the entire thrust of the journey is towards “drawdown & UFPLS” and decumulation is reduced to the receipt of benefit statements. The ABI’s view on innovation which might help the non-advised to turn pot to pension, seems stuck in pre 2015 annuity purchase.

Meanwhile VFM is given a nod as an important part of pension communication.

Government should ensure Value for Money frameworks are aligned across workplace pension schemes and are focused on improving member outcomes.

Having dismissed IGCs and Trustee VFM statements to a regulatory backwater, it is not clear what VFM reporting is designed to do other than improve voluntary savings ( aka “improve member outcomes”).

VFM reporting has long been a branch of marketing to the ABI and it’s hard to see it supporting any initiative that allows the public to determine where value is not being given for their money invested in retirement.

The nitty gritty

The ABI’s proposals are back end loaded, with the proposals on how AE can be reshaped to its advantage coming at the end of the document. But early on it acknowledges that pension taxation is already doubled in the past 20 years.

Most of this tax relief has benefited the wealthy and the ABI don’t use this paper to push for any reforms that might re-balance that. Instead, they are looking for Government to increase the taxes on small businesses paying minimum contributions and particularly on the self employed.

One idea proposed to fund pension saving is to increase Class IV NICs to 12% for all self-employed people but divert 3% of this to a pension pot if individuals also contribute to into a pension. (sic)

As far as I can see, this would be a compulsory pension tax on the self-employed with no opt-out. What you get for the extra 3% if you don’t set up a self-employed personal pension with an insurer isn’t clear.

After a nod to the potential solution to the net-pay anomaly, (which the ABI claim to have been lead in sorting), we get to the mainstream reforms they propose for auto-enrolment.

This involves getting contributions to be paid from pound one by gradually reducing the Lower Earnings Threshold. This helps insurers by increasing contributions per pot , improving overall profitability especially on smaller pots (which lose AE providers money).

 

We propose that year on year, the lower qualifying earnings threshold is lowered, starting in 2023/24 to signal within this Parliament that the 2017 review recommendations will be acted upon. This will be especially beneficial for the 30% of
employees who only receive pension contributions on band earnings (earnings on salary over £6,240 and under £50,270 currently). The DWP estimated that removing the lower
qualifying earnings threshold would create an additional £2.6 billion in annual pension savings

As reported on this blog earlier this month, the small pots initiative has floundered as no pilot has been agreed. Blame has been placed on the Treasury for allowing protected retirement ages to get in the way of auto-consolidation. The ABI is now looking for force majeure from Government to sort the problem it has failed to sort itself.

Government to include the small pots solution legislation in the same Pensions Act with AE eligibility changes. This legislation should also enable contract-based providers to carry out non-consented transfers.

The proposal that personal pensions can be consolidated without member consent begs the question “whose pension is it anyway”. The one distinguishing feature of a personal pension is that the pot is  the property of the policyholder rather than a trustee. This feature cannot be set aside to suit insurers when a personal pension is not profitable.

There are further suggestions for Government which are equally self-serving. This includes a recommendation to keep low earners excluded from saving, at least till the ABI has got its way on other proposals

Government to keep the earnings trigger for automatic enrolment frozen at £10,000, at least until the LET is removed and a solution to the small pots problem is in place.

The ABI scurrilously suggest that low earners may not be best served by saving into a pension at all, I wonder how many ABI members have thought through the implications of having “needs met by the state pension” – this is the language of the 21st century poor-house.

Any reduction to the earnings trigger should include an assessment of the benefit of private pension saving for those whose needs will be met by the State Pension.

And to further improve the financial metrics of auto-enrolment (to the insurer’s P/L and balance sheet) , the paper climaxes with a proposal to increase contributions to 12% of total earnings in the next ten years. For many people this will mean an increase  of band earnings from 5 to 6% and a further payroll deduction for the 6% of earnings they would now pay on earnings below the lower earnings threshold. But for employers, already struggling with massively increased NI costs, the cost of auto-enrolment would more than double in 7 years.

As if all this is not enough, the ABI finally propose an utterly cynical proposal to solve the small pots problem.

Government should launch a green paper investigating early access to pension saving in the case of significant financial hardship. This should consider expanding the list of permitted reasons for authorised payments from pension savings to
include financial hardship. Any reform should coincide with the increase of minimum pension contributions.

So, to prevent any squealing from consumerists, people would be allowed to cash in their pension pots when they chose because they claimed to be broke. This will certainly reduce small pots but at what cost? I find it hard to fathom how the ABI has the gall to float this idea which is wrong in so many ways.

Last words

The ABI clearly see auto-enrolment needing a boost. These proposals are designed to boost the profitability of the insurers, they are designed to weaken the protection of consumers and they do not even try to solve the problems people have turning pots to pensions. The principal issues that AE providers have are addressed through various measures to reduce small pots and improve the size of bigger ones. But this is at the expense of lower earners who would continue to be excluded by the earnings trigger.

The self-employed would be expected to pay 3% of earnings more in NICs to be enrolled , for which they would get no incentive but what’s currently on the table and the paper darkly hints that most poor people would be better off relying on state pensions and using whatever pension savings they might accidentally make, on relieving immediate financial hardship.

It is hard to think of a more cynical set of proposals.