Newsletter – April 2016


Pensions News Bulletin April 2016

1. Pension Freedoms: One year on

It’s been a year since over 55s have been allowed to take the whole of their defined contribution (DC) pension scheme as a lump sum, paying no tax on the first 25% and the rest taxed as if it were normal earnings on the relevant marginal rates.

So how did it go?

Data from HMRC shows a total of 188,000 savers have released about £3.5bn from their pensions over the past year. Most commentators say this has been a release from pensions into the economy but this misses the point that much of it transfers to other pensions often with higher fees where they are directed into more complex strategies or more specialist funds.

What were their choices?

Most pension schemes are not designed to effectively manage any more than the simple pension or cash alternatives, but some provider firms offer more flexibility resulting in a rise in scheme transfers from the workplace pension scheme to self-invested personal pensions (SIPPs).

Most popular of the new choices by far is of course total cash out. This is because it’s the most accessible and useful option for small and medium sized pots. After this – a long way behind – is the most complicated to describe but the product which actually produces what many people would think is the most sensible long term targeting approach for medium to higher sized pots. This is the uncrystallised funds pension lump sum (UFPLS), which allows savers to take ad hoc amounts of cash while the rest remains within the pension, and therefore sheltered from tax. This is followed in popularity by flexi-access drawdown which although most flexible may be the most expensive option in arrangement fees. Annuities, which were the most popular way to draw pensions before the freedoms, as they were mandatory except for the smallest pots, have of course fallen in popularity.

Its difficult to get reasonable data on the proportions of people using each of these flexibilities as numbers are tilted towards what certain companies are selling. For instance numbers I’ve seen for UFPLS seem high if read across the population but are more likely to represent individual provider’s own sales experience. Stronger data will be available in due course.

Why are the flexibilities popular?

For many people the amounts they have accrued don’t appear to them to be worth leaving as an annuity even if the annuity can be shown to be good value. An annuity is guaranteed and will last their whole life but for each £10,000 pa of annuity your pot needs to be around £200,000 to a quarter of a million pounds at least. Not many people in the population have accrued DC pots of that size. So as pensions are normally described as weekly amounts, if your pot was £8,000 and you’re told you will receive an annuity of £7 a week it’s not surprising that £8,000 right now seems more worthwhile.

Where was it spent?

According to various surveys, of those who cashed out, 20% used pension freedoms to pay off debts. Another 20% spent on home improvements. About 75% saved or reinvested some of their cash, and 60% of those not surprisingly chose banks current accounts rather than take any risk with the nominal value while having easy access should they need it.

What I would like to know is how many of the over 55s who accessed their pension freedoms are continuing to work and earn. For me this will be the growing trend and for a smart structured employer it can also ease younger recruitment and increase profitability. Magic? Yes. If that’s what you call smart thinking and effective future proofed personnel strategy, but that’s another story.

2. Who’d be a Senior Manager in financial services now?

There is a regulatory governance regime in financial services called the Approved Persons Regime (APR). It was designed by the financial regulators to hold financial firms and individuals to account but in the aftermath of the 2007/08 financial crisis the Parliamentary Commission for Banking Standards (PCBS) observed that the regime created a false impression of regulatory control over individuals while meaningful responsibilities were not in fact attributed to anyone. As a result, they said there was little realistic prospect of enforcement action, even in many of the most flagrant cases.

Do you find that as Incredible as I do? Or is it a typical result of over regulation and tick box compliance? Anyway it’s certainly serious and the PCBS’s recommendations for change were adopted by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The replacement regulatory framework is the Senior Managers and Certification Regime (SM&CR) which applies to the banking sector from 7th March 2016 and will be rolled out to a further 60,000 financial services firms including insurance companies, asset managers, mortgage brokers, consumer credit firms and stockbrokers from 2018. This is a huge job and will require a rethink and some reorganising in most financial firms.

The change from APR to SM&CR is driven by the discovery that matrix management in companies makes it difficult to identify responsibility and therefore culpability when wrong doing occurs. However it’s also a symptom of leadership and management quality, showing how few organisations make matrix management or genuine governance work effectively. The appropriate performance and operational controls are missing. Not surprisingly things are usually going wrong before people realise. The controls need to be installed from the start or as soon as possible after reading this!

So what’s happening? The government has decided to introduce a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This will apply across all authorised financial services firms. In the event of regulatory breach the senior managers can be guilty of misconduct if they failed to take appropriate steps to prevent the breach. This directly puts their jobs on the line and opens the door to more serious personal sanctions.

The key features of the extended SM&CR are:

  • an approval regime focused on senior management, with requirements on firms to submit robust documentation on the scope of these individuals’ responsibilities
  • a statutory requirement for senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility
  • a requirement on firms to certify as fit and proper any individual who performs a function that could cause significant harm to the firm or its customers, both on recruitment and annually thereafter
  • a power for the regulators to apply enforceable Rules of Conduct to any individual who can impact their respective statutory objectives.

You can read about the Senior Managers and Certification Regime: extension to all FSMA authorised persons here.

3. MPs worried about Lifetime ISAs derailing auto enrolment

The Work and Pensions Committee is reopening its inquiry into auto enrolment due to concerns that Lifetime ISAs, announced in the March 2016 budget, will damage the expected take up of auto-enrolment by the impact it could have on opt-out rates.

The Lifetime ISA (LISA) will be available to any adult under 40 from April 2017. People will be able to save up to £4,000 each year and will receive a 25% bonus from the government on every pound they put in, until the age of 50. The LISA can be used towards buying a first home or as retirement income without a withdrawal penalty. There is a logical concern that the LISA will undermine pensions auto enrolment as people may choose to save in the LISA instead of their employer pension. People may also not consider where their money would be better off, or the benefits of employer contributions.

The Committee sees the contradiction between what the Treasury is trying do with the LISA and the auto-enrolment objective of ensuring people have sufficient income in retirement. Saving to buy a home is a more immediate priority than accumulating an adequate pension. The auto enrolment minimum contributions rising over the next 2 years is also likely to exacerbate the issue.

In evidence to the Committee on 23 March, Huw Evans, Director General at the ABI said: “The critical element of all this is that it doesn’t end up encouraging employers to say “choose the LISA instead”, and thereby trying to duck out of their pension contributions. That would obviously run completely contrary to the grain of public policy that’s been agreed on a cross-Party basis for the last ten years”. He further noted that if more affluent under-40s take cash from their existing ISA and put it in the LISA to earn the Government contributions, that isn’t a good use of public money.

In the same evidence session, Joanne Segars, Chief Executive of the PLSA, told the Committee “We would be quite concerned if people took up the LISA option at the expense of matching contributions into their pension scheme.”

The Work and Pensions Committee invited written submissions addressing the following points:

  • To what extent is the Lifetime ISA compatible with auto enrolment and the Government’s wider pension strategy?
  • What impact could the introduction of the LISA have on opt-out rates?
  • To what extent will the LISA fill gaps in retirement saving among the self-employed?
  • Are there more appropriate alternatives?
  • Which groups would be better/worse-off saving into the Lifetime ISA than they would be under auto enrolment?
  • What kind of guidance should be made available to help young people choose where to save their money?
  • What impact will the option of using LISA savings to purchase a home (or potentially “other specific life events”) have on pension savings?

Submissions closed on 17th April so we should hear the findings in a few months.