Newsletter – October 2016


Pensions News Bulletin October 2016

1. Auto Enrolment passes 200,000 employers but still produces diddly squat and could be critically wounded by Lifetime ISAs.

More than 200,000 employers have now completed their workplace pension duties as automatic enrolment continues to roll out to small and micro employers.

The latest Declaration of Compliance report shows that by the end of July, more than 6.5 million workers had begun pension saving after being put into an employers pension scheme.

As Auto Enrolment started in 2012 the report also provides the stats now coming through of the continuous re-enrolment processes at the 3 year anniversaries of employers staging dates.

Mighty oaks from little acorns grow, and bearing in mind the average contribution it will be oaks growth timescale before most auto enrollers have enough invested to provide them with other than a small to moderate cash sum to withdraw at or beyond age 55.

Some people ask why pension freedoms legislation was introduced. Well if it wasn’t to deal with the auto enrolment problem of providing cost effective annuities for tiny pensions and people’s consequent disappointed reactions to sub £1,000 a year retirement income, then I would be surprised.

This is not to rubbish the principle of auto enrolment because the employer’s contribution and tax relief give savers extra money they wouldn’t otherwise receive. However to many people a pension is a pension and comes with the assumption that it provides an income to live on. Because they have a ‘company pension’ or a ‘private pension’ as many people call them, they imagine it’s going to provide them with greater spending power than it will. This has been proven time and time again from answers I’ve received in pension presentations, workshops and surgery’s all over the county, over many years. For this reason we must engage with employees along their investment time line to manage expectations and mitigate their disappointment and anger when they realise how little in absolute terms they will receive.

If we don’t engage well enough about the value of even small pension savings, the Lifetime ISA, which launches next April, and has an attractive tax payer provided bonus of 25% a year on a maximum £4,000 a year contribution, is likely to appear more attractive to almost all people saving for a house purchase. The result here could be millions of pension savers opting out of their pension scheme regularly after each three year reenrolment process, creating inconvenience for them, higher operational costs for employers and even smaller auto enrolment pension pots.

2. FCA report on 6 months of new senior managers’ regime

Early in 2016 the FCA implemented the Senior Managers’ and Certification Regime (SMCR) which I reported in these bulletins. These new measures are part of the FCA’s focus on improving culture in the financial sector. They help the FCA identify and assess key senior individuals accountable for specific activities.

After the 2008/9 financial crash it turned out that the previous Approved Persons Regime was not sufficiently robust to allow specific responsibility, for critical activities, to be assigned to specific persons. This was quite a shocking revelation and may be why hardly anyone has been censured for the headline making malpractices that crashed the markets. However I suspect many of us can see how the growth of matrix management in large organisations can obscure where accountability sits, particularly when something goes wrong and each link in the matrix can deny culpability.

After 6 months of practical experience with the regime the FCA have recognised the good efforts amongst many firms but still point out that in some cases….

  • there is evidence of overlapping or unclear ownership of responsibilities;
  • firms appear to be sharing responsibility amongst junior staff,
  • obscuring who is genuinely responsible….

…contravening the intent of the Senior Managers and Certification Regime.

The SMCR which has so far been rolled out in the banking sector will be implemented in all regulated financial services firms from 2018.

In advance of the implementation of the SMCR in your insurance company or other financial service provider do you know how they are preparing? It is a question fiduciaries ought to ask. The complexity of these businesses certainly means they have a great deal to do if they want the accountability and responsibility lines to be clear, not just on paper, but to work in practice as well.

You can read the FCAs report here.

3. Brexit and Pensions – what should we do?

There is a great deal of speculation about the effect of Brexit on everything, even pensions and investment, and I suggest a wise answer to the title question is

a) we wont know until we’ve negotiated it and

b) decided how we proceed from there.

However trustees and other fiduciaries need to consider these newest set of risks and prepare for the uncertainty and volatility as circumstances change.

An important consideration is to keep pension scheme members and employees appraised of the situation with their own pension schemes so the media pension shock stories (BHS, British Steel and more to come) are kept in perspective as far as their savings and investments are concerned. Otherwise they will opt out or contribute less or decide to invest in even more risky vehicles because their friend, relative, or colourful scam mail told them it was better.

So regular reassurance is helpful. If the scheme or provider has a newsletter we should ensure it carries the right messages and that it’s topical. The relevant articles must pass the ‘so what’ test. Little and often is usually more effective than several pages once annually.

In light of Brexit fears and bad news headlines it is worth reviewing the communication strategy to see if it should be updated.