UK: A year of implementation
This year has seen the rushed implementation of the dramatic changes introduced to the UK defined contribution sector in 2014
Regulation in summary
• Ros Altmann, now a Conservative member of the House of Lords, replaced Liberal Democract Steve Webb as pensions minister after May’s general election.
• The requirement for compulsory annuitisation for DC savers has been removed, opening the market for income drawdown and cash withdrawals.
• The Local Government Pension Scheme sector faces its second consultation in as many years as the government retreated from forcing passive investment and collective investment vehicles.
• Legislation allowing collective defined contribution (DC) schemes was passed, opening the way for private-sector companies to move away from defined benefit without shifting to individual DC.
If 2014 was a year of change for the UK pensions industry, then 2015 is looking like one of implementation. This year the previous government put in place plans for more freedom in defined contribution (DC) and also brought in charge caps on investment funds.
Then, in May, the UK went to the polls and returned a majority Conservative government. Two industry figureheads – pensions minister Steve Webb from the Liberal Democrats and opposite number Gregg McClymont of Labour – lost their seats. The Conservatives then appointed Ros Altmann as the new pensions minister. She sits in the UK’s second chamber, the House of Lords.
Just before the election, the liberalisation of compulsory annuitisation came into effect. The government announced the Freedom and Choice in Pensions agenda in 2014 and published the final legislation a few weeks before 6 April 2015 when changes were enacted via the Taxation of Pensions Act 2014. This removed compulsory annuitisation and allowed DC savers freedom on how to withdraw their savings.
No-one could accurately predict the reaction of pension scheme members aged over 55 years who suddenly had complete access to their DC savings. But providers geared up with extra administration staff to deal with enquiries. After a slow start, figures from the Association of British Insurers showed that within the first two months over £2bn had been withdrawn from DC pots with almost half of that taken as cash.
The changes to legislation meant a complete overhaul of the way UK DC schemes invest for members approaching retirement, with an end in sight of the lifestyle system that shifted investments from growth assets to annuity-matching.
Many of the larger DC providers, including Now Pensions and The People’s Pension, reacted by shifting investment strategies into cash for those nearing retirement. The expectation was that the small pots accrued would not be used to buy an annuity but taken as a lump sum.
The National Employment Savings Trust (NEST), the state-backed DC master trust, began discussing its future structure with the industry in its Future of Retirement consultation. NEST drew up a new design focused on blending income drawdown and deferred annuities in a bid to match consumer desires and set a standard for future DC schemes.
Elsewhere, the Pensions Act 2015 became law, crystallising Webb’s vision for risk-sharing DC schemes. Webb had pushed for the introduction of a collective DC (CDC) scheme since 2010, with legislation finally passing through Parliament. The new rules created a legal definition for pension schemes that offer a pensions promise, but not a guaranteed benefit.
In the early months of the legislation there was no movement among the private sector to create CDC schemes. Under current regulations it is difficult to imagine any scheme being more than the merging of member pots to save on costs. However, NEST, in its proposals for future design, said it would consider mortality pooling in a CDC scheme as a method to provide deferred annuities – but it also raised several concerns.
The Act also complemented the Freedom and Choice agenda by adding new rules on transfers between DB and DC schemes. The government banned transfers from unfunded public sector schemes and reduced the cash-value in the funded Local Government Pension Scheme (LGPS) sector to dissuade members from transferring.
Concerns were raised that transfers would create huge cash calls on DB schemes but the government allowed transfers to remain for private sector schemes. Some, including the £10.8bn (€15.4bn) BBC pension scheme, are looking to offer transfers to DC as a method of risk-reduction. Consultants suggest that, with the right cash valuation, transferring deferred members from DB to DC schemes could be beneficial for both parties.
The new government is also looking to re-ignite the debate on cost savings within the LGPS. In 2014, the government started consulting on whether to force the 89 LGPS in England & Wales, with over £180bn in combined assets, to only invest in listed equities and bonds passively, and invest in alternatives via a collective investment vehicle.
The suggestions caused outrage among many in the industry, particularly LGPS funds with long traditions of in-house investment management and above-average performance.
In July’s Budget the government suggested it would again consult with the LGPS but this time on defining cost-cutting criteria that could be achieved via collaboration. It said LGPS funds should approach the government with suggestions and examples of how the 89 could work together to save on costs, before it was forced into action. However, the Budget did suggest that any schemes not active in this approach would be forced to invest via a collective vehicle.
Also in the Budget, the chancellor announced a consultation in the autumn regarding the tax treatment of pensions savings. Currently, members contributing to pension schemes are exempt from income tax on contributions, but are taxed on income in retirement. The consultation will look at overhauling the current tax regime, and consider shifting tax-treatment onto contributions and away from retirement income.
The government remains adamant that it is open to ideas around the tax treatment of pensions. However, after some of the biggest changes to the UK industry in a generation via DC freedoms, the future looks set to consist of constant change.