What might the year ahead hold for pensions? Chris Wagstaff, head of pensions and investment education at Columbia Threadneedle Investments explores.
If there’s one thing you can guarantee with UK pensions, there will be change. The question is whether that change will be a help or a hindrance.
Helpful change is that which will encourage greater and much needed engagement with pensions, leads to higher and more broadly based levels of saving, guides more informed decision making and ultimately generates better financial outcomes to and through retirement.
However, as these laudable long-term social policy objectives are largely diametrically opposed to George Osborne’s more immediate focus of balancing the country’s books, pension policy is very much a hostage to the UK’s fiscal fortunes.
So what might 2016 hold for the UK pensions landscape and will it be helpful?
First the certainties.
The basic state pension will rise by 2.9% to £119.30 per week (help) while the new “single tier” state pension will be introduced at £155.75 per week for those reaching SRA after 6 April with 35 years of qualifying national insurance contributions (NICs) (help). However, only 38% of those qualifying for the new state pension in 2016 will receive the full amount (hindrance).
Savings levels will invariably be hit by the introduction in April of both tapering to the annual allowance”
Auto enrolment (AE) will continue to gather momentum and widen the coverage of pension saving (help) though minimum contribution rates will remain at 2 per cent of band earnings until March 2018 (hindrance).
Savings levels will invariably be hit by the introduction in April of both tapering to the annual allowance, which will see high earners limited to £10,000 of employer and employee contributions, and the reduction of the lifetime allowance to £1m, which will catch many modest earners with long pensionable service in a DB scheme and those with substantial DC savings (hindrance).
However, on the plus side, the new and much simplified TPR DC Code will see the light of day next July. With its focus on six key areas, not least ensuring value for scheme members through advanced DC governance, member outcomes should be greatly improved (help). Running parallel to this, the FCA’s market review should see asset managers upping the ante on the disclosure of transactions costs.
Improved governance should lead to better outcomes and member security for the LGPS”
Meanwhile LGPS consolidation will progress as alliances between administering authorities continue to be struck and a clearer picture emerges in February of the number, size, governance and investment strategies of the new asset pools, or “wealth funds”.
On balance, the resulting improved governance should lead to better outcomes and member security for the LGPS’ 4.6m members (help).
Other events are less certain.
With a relatively quiet Autumn statement, the 16th March Budget could prove a lively affair.
The results of the Treasury’s “Strengthening the incentive to save: a consultation on pensions tax relief” could well see a move away from the exempt, exempt, taxed (EET) model to TEE in an attempt to save the Treasury a whopping £35bn in pensions tax relief per annum, less the tax take from pensions in payment and freedom and choice lump sum withdrawals (hindrance).
However, there is every chance of tax relief being retained, albeit at a single rate that would be tax neutral for the Treasury (help). While the move to TEE would encourage the development of a Pensions ISA, the latter would stymie the idea.
There is every chance of tax relief being retained, albeit at a single rate”
Then, of course, there’s the very real prospect of NICs-saving salary sacrifice arrangements for employee contributions to workplace pension schemes being scrapped (hindrance), at a time when the end of contracting out will significantly increase NICs for numerous employees and employers.
The 25 per cent tax free cash lump sum at retirement is also at risk (hindrance).
As to helping make decision-making around pensions more informed, there will be much hope and expectation surrounding the FCA’s Financial Advice Market Review recommendations on how best to address the UK’s widening advice gap, to be announced in the Budget. My intuition is that advice will somehow be made more accessible (help).
Closely linked to that, the Treasury may well announce plans to make Pensions Wise-style guidance more widely available, notably to those yet to embark or at the very early stages of saving for retirement (help).
The popularity of master trusts as the savings vehicle of choice for many auto-enrolling employers, not least with 1.8m small and micro employers now being brought into the fold (itself providing a stiff challenge for the continued success of AE), will likely continue.
Discussion around collective defined contribution might resurface”
However, we could see the beginnings of consolidation as concerns around the sustainability of many master trust business models and the need to gain critical mass become more pronounced (help).
Discussion around collective defined contribution might resurface while thinking around how a secondary annuities market might work in practice will gather momentum. Hopefully, we will also see a much needed boost to the range of products to meet the needs of those taking advantage of pension freedom and choice (help).
Finally, there is every possibility of planned increases to the state retirement age being accelerated with a formal link to nationwide longevity improvements. However, while this will reduce the long-term burden on the public purse, as the OECD observed in its recent annual “Pensions at a Glance” publication, keeping people in work for longer might prove problematic as the health longevity of the nation has failed to keep pace with improved longevity (hindrance).
Keeping people in work for longer might prove problematic”
Of course, as the year end approaches, world peace is often at the top of most peoples’ wish lists. For me, coming a credible second would be for 2016 to be the year when pensions policy initiatives that improve engagement, savings levels and coverage and better decision making move us to a more sustainable footing in generating better financial outcomes to and through retirement.
However, like most others, I approach 2016 with some trepidation.