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    From Ros Altmann:economist and pensions,
    investment and retirement policy expert

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    Pensions Predictions for 2019

    Pensions Predictions for 2019

    What 2019 will bring for Pensions

    2018 has seen the start of some important pension policy trends, which will continue into 2019. What is most likely to happen and what still urgently needs to be done? Here are some thoughts.

    1. Auto-enrolment program finally fully implemented as pension contributions double in April 2019, amid hopes that the behavioural success will keep opt-out rates low: As pensions auto-enrolment continued to roll out across the country, opt-out rates were unaffected, despite the doubling of contributions in April 2018. Contributions will double again in April 2019, to reach the full 8% of ‘band earnings’, with high hopes that the behavioural impact of inertia, which has been so successful so far, will keep opt-out rates low. This final increase will coincide with the significant rise in the personal tax threshold, making the higher contributions less noticeable on take-home pay.
    2. More mergers of Defined Contribution (DC) pension schemes expected as MasterTrusts must all be authorised by March 2019: By the end of March 2019, all workplace DC pension schemes must be authorised with the Pensions Regulator. This process requires schemes to prove they have proper processes in place and financial resources to underpin the scheme in the event of wind-up. Not all of the 80+ MasterTrusts will be able to meet the requirements and a process of consolidation is underway that is likely to see less than 30 MasterTrusts remaining in operation. Many workers will find their pensions transferred to a new scheme and trustees of these pension arrangements will need to be very careful to ensure members’ interests are well looked after.
    3. Moves towards consolidation of DB pensions: As 2019 unfolds, assuming the Brexit situation does not delay all other issues, I would expect to see more moves to address the future of DB pensions. Many schemes will have been hit by the financial market turmoil in 2018 and the impact on deficits, as well as on employer strength, is uncertain. Most employers are running closed schemes now and, as time goes on, will have fewer, if any, workers accruing pensions in their scheme. Yet the risks remain with the employer to pay pensions for decades into the future. All sponsors will be looking for ways to offload these risks from their balance sheet, so I would expect increasing moves towards buying out with annuities if affordable, or consideration of the new scheme consolidator approaches for those employers for whom annuitisation is not attractive. The Pensions Regulator’s new chief, Charles Counsell, will have an important task in overseeing the workings of these new DB consolidators, especially in light of the ongoing problems related to GMP equalisation.
    4. Introduction of CDC legislation: I would anticipate that the recent consultation on introducing Collective Defined Contribution (CDC) pensions will result in legislation. This will be particularly relevant to the Royal Mail staff, who are pressing for an alternative to their current DB arrangements which does not entail the wholesale transfer of risk onto each individual member. If this legislation is introduced, I would not expect it to lead to a largescale shift of pension schemes towards CDC. I expect most employers will want to use just DC arrangements in future.
    5. Single Financial Guidance Body to start working on Pensions Dashboard: In early 2019, the Government wants the new Single Financial Guidance Body to begin. This will merge the current free national guidance services of Money Advice Service, the Pensions Advisory Service and PensionWise into one public body, designed to help consumers better understand and manage their money. Ministers recently announced that this new Body (which has yet to be named) will do the initial work on a Pensions Dashboard. In another ongoing consultation, the Government has set out plans to ensure the Dashboard project gets underway at last. This is long overdue and was first mooted several years ago, but little progress has been made so far. It is expected that providers will be asked to upload data on people’s pensions, which will ultimately allow everyone to see all their pensions in one place. In order for this to be successful, many hurdles have yet to be overcome. The most important initial obstacle is that current pension records are unreliable.
    6. Project urgently needed to check accuracy of pension contribution records and correct errors: During 2019, it is vital that the Pensions Regulator turns its attention towards ensuring pension contributions are paid correctly. It is well known that legacy pension records are unreliable, as old pensions were recorded manually and never transferred to digital format. However, even with the latest contributions under auto-enrolment, it has become clear that there is no proper process in place for ensuring the contributions paid are correct. The rules of auto-enrolment emphasise the importance of employers making contributions for their staff, there are strict requirements, checks and whistle-blowing regulations that are designed to ensure employers comply with their duties. However, these focus only on whether or not money is being paid. As long as a contribution is made, there seems no concern about whether it is the right amount! No requirements to report to the Regulator that the accuracy of records has been checked, errors do not need to be regularly reported or corrected. No Pensions Dashboard project can succeed if the underlying data are wrong. And the whole process of MasterTrust mergers could be undermined by inaccurate data being moved from one scheme to another. The pensions industry has been plagued by past mistakes, it is really important that providers and trustees pay urgent attention to correcting contribution records as soon as possible.
    7. Greater emphasis digital integration of pension contributions between payroll and providers to improve accuracy, efficiency, security and reliability of data – and lower costs: I expect to see an increasing trend towards assessment of the value for money in pensions. Cutting costs of administration can be achieved by ensuring more pension contributions are moved onto digital platforms via APIs, which can improve the accuracy, security and reliability of pension data.
    8. 2019 needs to see serious attention paid to ensuring the lowest earners are treated fairly in auto-enrolment: The biggest scandal in UK pensions remains unaddressed. Under auto-enrolment, all workers earning above £10,000 a year must be automatically enrolled into a pension scheme chosen by their employer. If employers use the wrong pension administration system, these low earners, mostly women, will be forced to pay 25% extra for their pensions. The Government and the pensions industry has so far failed to take this problem seriously, but it has the makings of another almighty pension scandal, which is the last thing the industry needs. I have long been urging a solution, with the Pensions Regulator insisting that no low earner should be denied the 25% bonus they are entitled to if their employer chooses the right pension scheme for them.
    9. Improving pension coverage for the self employed: There has been a growing gap between the pension coverage for workers, relative to the self-employed. The pensions industry has been slow to address the pension needs of this part of the British workforce, relying on lobbying Government to cajole pension contributions out of them. The success of auto-enrolment has been down to the impact of inertia, with staff having all the hard work of setting up a pension scheme and making contributions handled by their employer. The employer also pays in for them, so the incentives are extremely powerful. A worker who pays money in, should have their contribution at least doubled on day one (unless they are a low earner who loses out because they are in the wrong type of scheme). But the self-employed rely only on the incentive of ‘tax relief’ which is opaque and poorly understood. For higher earners, the incentive effect is powerful (at least £2 is added for every £3 they put into their pension), but for the self-employed on basic rate tax, the incentive is far less. There are several ideas for encouraging self-employed pension contributions, including a form of automatic deduction of contributions via the tax system, but ultimately it seems to me that the pensions industry itself needs to enthuse people about pension. Perhaps offering prizes or other attractive features which the self-employed might value. Pensions are a brilliant product since the 2016 freedoms were introduced. Money rolls up tax-free, the Government adds to your own contributions, it can be passed on tax-free and will only be taxed at marginal rates when withdrawn in retirement. A public promotion campaign for pensions is long overdue.
    10. Simpler Annual Statements to be used in 2019: I expect to see the introduction of simplified statements for pensions during 2019. One of the biggest problems in pensions is the use of baffling, impenetrable jargon. Much good work has been done to revise the way pension companies communicate with their customers. It would be hugely helpful to have just one standardised way of presenting people with the vital information about their pensions, that can help them see how much they have, what it could be worth in future and how they might plan to improve their pension prospects. A prototype statement has been tested and is ready to be rolled out, I hope that all pension providers will either use this voluntarily, or be required to do so by the Regulator.

    3 thoughts on “Pensions Predictions for 2019

    1. Thank you for your hard work. I’m 59 and just starting to draw pension while continuing to add to pensions.

      Point 9: If you are basic rate tax payer, I suggest people look harder at ISAs instead of pensions.

      For example, you earn £1000, lose 20% tax, put into ISA and it goes up 30%, value = 800*1.3 = £1040
      Or
      Put £800 into pension, government adds 20%, it goes up 30% = £1300. You take out first 25% tax free = 325. The remaining 975 is taxed at 20% = 780. Giving total of 325 + 780 = 1105

      A £65 benefit (or 6.25% over the duration) of the pension route is not necessarily worth the long term exposure to changing government regulation of pensions compared to freedom of ISAs.
      For 40% tax payers making contributing or people below the tax threshold when withdrawing the benefits of pensions are clear, but for most people, not.

      Isn’t this all overly driven by the pension industry who charge noticeable pension management fees and yet have no control over stock market performance?

    2. Dear Ros
      I wish for your predictions to come true but fear the strength of implementing them, nor attitude of regulators and politicians is not forthcoming in sufficient impetus
      Here are my thoughts:
      Whilst raising awareness to high level issues there are a few points mentioned which may benefit from greater emphasis and a different slant on interpretation.

      1. Measurement of auto enrolment using the opt-Out rate has been misconceived by Politicians from the start. Yes, it is relatively low to initial expectations and remains consistent but it is what I call the ‘Hit Ratio’ which should be the measure of success. With O/O rates around 9% Gov back clapping is projecting an incomplete picture. The true Hit Ratio of qualifying membership was around 60%, currently it is between 40 – 45%. Identifying the reduction influenced by the increase in contributions is hard to establish but the main reason is the widening gap in the trigger point and the personal allowance as employees have not qualified in the first place.
      6. Identified in (5) – accurate Data is King. Trustees and Administrators have been blinkered for many years in assuming they only have to keep within Pension Legislation; they have ignored other important Acts of Parliament (Equality, Employment, Data Protection and GDPR) and are now having to catch up (GMP equalisation, Common and Conditional Data, Taxation) and now it is happening again with auto enrolment – already data is out of sync, members are not receiving correct tax relief, trustees are not protecting members’ funds being transferred out. These areas are not new and tPR have been lax in enforcing the rules already in place – Conditional Data includes ensuring the correct contributions are received yet many trustees questioned consider as you have highlighted that they do not need to verify the actual contributions -yes they do. They have a duty of care to ensure the employer pays the appropriate amount, not just the percentage which on the surface is impossible to verify. This will also ensure data efficacy is suitable for mergers without having costly separate exercises to redress errors. The rules need enforcing properly on a regular as part of annual audits basis not as special projects.
      7. API conduits are a must and all payroll systems should be updated compulsorily with an industry standard (the PAPDIS protocol already exists) and it need rolling out to all payroll providers. The file should also include ‘qualifying earnings’ used to calculate the contributions – this was excluded from the early PAPDIS file, influenced by traditional providers who didn’t want to amend their systems to verify the contributions based on their ‘interpretation’ of the AE rules!
      8. Again, messages from political and some industry quarters are inaccurate. Low earners have been cheated out of their tax incentive by the Government. Employers or providers are not at fault as they chose their AE scheme based on the rules at a time when the qualifying trigger levels were equal. George Osborne moved the goal posts and either ignored advice or wasn’t adviser correctly and the 3 years since then DWP and tPR have gone out of their way to ignore the problem and even hide the fact they issued compulsory communication templates telling members they will receive the Government top-up. This is not ‘becoming’ an urgent problem Ros, it has already been for several years’ mis-selling at its most appalling level.

      The solutions to these problems are already out there. The rules already exist and it is time the Regulators and those in power made immediate changes to rectify the inequalities and tighten enforcement of the basic rules and guidelines. There needs to be a change of attitude by politicians and regulators that the ailments of AE, incorrect tax relief, bad data are caused by them, not the employers. They shouldn’t be expected to change scheme every time the tax rules and they shouldn’t be retrospectively blamed for making their decisions when there was a level playing field subsequently changed by the Chancellor and not queried by those who created the rules.
      Best Wishes for 2019

    3. Jim Oswald,
      Unless of course you can benefit from ‘free’ contributions from your employer, which tilts the balance firmly towards the pension, I would think.
      If you are selecting your own SIPP then there are some that charge flat fees instead of percentages. Fund charges vary tremendously in ISAs and pensions, but knowledge is power as they say!

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