Pensions News Bulletin April 2015
1. £30,000pa maximum pension on its way
The Life Time Allowance for the total value of pension assets an individual can tax effectively hold has decreased, from £1.8m in 2011/12 to £1m from 2016/17. These values may seem high lump sums but they provide, right now, in the region of £26,000pa pension for a DC pension scheme member (with 50% spouses pension and 3% annual increases). Over a working life, average earners could now reach this cap and be maxed out on their pension saving.
Now we have pension’s auto enrolment, the government may have thought there is no need to incentivise pension saving beyond that level. After all, tax reliefs cost about £50bn a year in total, relief on pension contributions, national insurance and investment returns plus tax free cash, and have never been appreciated by the working population. Without a return on investment (appreciation and better savings patterns) why should any government continue with the same level of pension incentives? Of course the wealthy and very wealthy by and large use the tax reliefs to their best advantage, and will be hit as they become unable to take further pay and incentives in the form of employer’s pension contributions.
The general population though would likely appreciate incentives to save given in a different way, more visible and accessible. The government could get a better bang for our buck and also save money for other purposes.
Important issues come from this:
- Senior and not so senior executives will soon be less interested in their pension scheme and where that happens invariably less interest is given to pensions for the workforce.
- It becomes even more likely that pension contributions will not increase beyond statutory amounts and actually reduce the average per head compared to pre auto enrolment levels.
- How will companies choose to remunerate senior employees when they will be maxed out on pensions? An incentive too immediate will not have the retention effect you want. Bearing in mind the different priorities of Gen X and Y’s there could be room here for social, familial and educational incentives.
2. Pensions freedom could deprive workers of state pensions
The DWP has released a paper called Pension flexibilities and DWP benefits, which you can read here, in which it identifies the freedom to take pension benefits from April in more accessible ways than an annuity. It says ‘The way in which you use the new pension flexibilities could affect any future entitlement to benefits’ and goes on to explain that if you spend, transfer or give away any money that you take from your pension pot, the DWP will consider whether you have deliberately deprived yourself of that money. If they think you have you may not receive any state pension.
This is very significant because it is expected that the majority of employees over 55 will not buy an annuity, and therefore have access to their pot in more flexible ways. This is attractive to scammers and marketer’s of legal but unregulated investments. It is possible that workers who are attracted to the too good to be true investment and lose their money, may be thought to have acted recklessly by the DWP if they didn’t take regulated financial advice. And this could cause their state pension to be forfeit. It appears Steve Webb was wrong when he suggested it was okay to spend the pension money on a Lamborghini.
3. Dispelling 4 Myths
This month it’s on to Myth number three.
“Pension members need regulated financial advice”
Everybody could benefit from financial advice.
a) It’s a good thing to contribute to your employer’s pension scheme.
b) Contributing monthly has benefits over contributing all in one go and so on.
The most important financial advice all non-financial experts need is generic advice – not regulated advice – and employers should be confident to provide it. Doing so has many positive consequences for management and the workforce.
Not many of us realise how specific regulated advice is. The financial conduct authority even made clear that advice to buy shares in, for example, the oil sector or shares with exposure to a particular country, is not regulated advice but generic advice because it does not relate to a specific investment. Even advice on whether to buy shares rather than debt, for instance, is generic advice and is not regulated.
Within the FCA’s examples is all the validation necessary to allow finance managers, HR practioners or pension specialists to educate employees properly enabling them to engage fully with their pension scheme and other benefits. When people understand, they can make sensible decisions for themselves. Regulated advice, which is narrowly focused to product, is necessary in its place but it is not the correct approach for enabling a sense of financial well-being and giving employees a sense of financial confidence.
4. How do you know if your fund manager has done a good job?
Pension scheme decision makers ought to understand and be able to challenge their investment managers. To do this it’s useful to know some of the measurement criteria they use. Particularly, so you can ask them to tell you more about that measure for the fund you’re interested in.
Last month I introduced Standard deviation, this time we look at the Information Ratio.
The Information Ratio assesses the degree to which a manager uses skill and knowledge to enhance returns, this is a versatile and useful risk-adjusted measure of actively-managed fund performance. It is calculated by deducting the returns of the fund’s benchmark from the fund’s overall returns, then dividing the result by its Tracking Error (this will feature in May’s newsletter). This gives us the value of extra risk taken by the fund manager’s decisions, which have added to what the market would have delivered anyway.
The higher the Information Ratio the better. It is generally considered that a figure of 0.5 reflects a good performance, 0.75 very good, and 1.00 outstanding. This is particularly useful when comparing a group of funds with similar management styles and asset allocation policies.
Please contact me if you wish to discuss a subject raised in this newsletter.
Thank you for reading. Come back next time for more news and the next in the series of myths and investment ratios.