A Fond Farewell to Webb

Following the disastrous result for the Liberal Democrats in the General Election last week, several excellent MPs have lost their parliamentary seats, including the Pensions Minister Steve Webb. The fact that we are losing, arguably, the best minister to emerge from the coalition, is gloomy indeed. The reforms implemented by Steve Webb, the Minister for State Pensions,[1] have made the current pensions system far fairer and have allowed people far more financial freedoms. Despite receiving over 18,000 votes, Webb lost his seat in Thornbury & Yate to Conservative candidate Luke Hall. In a recent message on Facebook, Webb thanked his supporters for their backing and expressed his gratitude at having the opportunity to serve 18 years in Parliament. One of the sad truths of the way we assemble governments in the UK is that elections sometimes result in worthy and dedicated ministers being cast out; Steve Webb is an example of this in action.

David Cameron recently announced that Ros Altmann, a high-profile campaigner on pensions issues has been appointed pensions minister. Altmann is a City banker by training and previously worked as a director of Saga. Whilst her appointment has been widely welcomed by the pensions industry, only time will tell whether Altmann will have the same impact on the pensions system as Webb did.
During Webb’s time in the Department for Work and Pensions we have witnessed seismic change in the country’s pension system. Despite there being 10.3 million people over the age of 65 in the UK, a figure that has risen 80% since 1951, many of us are not saving enough money to see us through retirement.[2] In order to address this fact the Department for Work and Pensions introduced auto-enrolment.[3] Enrolling employees automatically into affordable and attractive workplace pensions may be a challenge of administration for employers, but auto-enrolment addresses a far greater problem. An ageing population means that more and more of us will be reliant for longer and longer on money saved from past employment. Therefore it is vital that employers honour the legal obligations inherent to auto-enrolment. If needed, there are many means by which employers can seek advice as to how to manage auto-enrolment and make the necessary payments.

Webb spearheaded several radical changes to pension policy. Now, those over 55 with a defined contribution (DC) pension policy are able to spend their pension pots should they wish to, rather than having to wait until their official retirement age. Although these new freedoms have led to concerns that many pensioners will blow their pension pots on “Lamborghinis”, it seems unlikely that those who have diligently saved their money in a pension fund would blow it all at once simply because they can. Indeed, research from Prudential Plc at the time the pension reforms were introduced suggested that only 2% of over 55s were thinking of making large purchases with their pension pots.[4]

It is more likely that pensioners will chose one of the other available options and either take out a small amount of money from their pension each year or buy an annuity. These freedoms signified Webb’s faith in the ability of the UK population to act responsibly. This faith is rarely seen in government ministers.[5] Rachel Reeves, the Labour Shadow Minister for Work and Pensions, expressed fears that some pensioners may be at risk of being ripped off by fraudsters or “forced to pay excessive fees”.[6] And she warned that pension providers were unprepared for the bombardment of people asking for advice on what to do with their pensions.[7] In contrast, when confronted with think-tank proposals to implement default retirement systems for DC pensions savers, Webb rejected them as unnecessary, adding that “There is no inconsistency between helping people do something they would not otherwise do – like building up pension savings – and then recognising that everyone is different and people should be free to do what they like with [their pension].”[8]

Webb is also responsible for the newly implemented 0.75% cap on pension charges. This cap will end the over the top charges enforced by pension providers and initiate a ban to hidden costs. This will make a huge difference to the individual and the UK as a whole: an employee with a pension pot of £30, 000 could benefit by £1,600 with a saving scheme that charged 0.75% compared to one that charged 1.5%.[9] In addition, the government estimates that an extra £195 million of pension contributions will turn into pension savings over the next 10 years.[10] In summary, the benefits are clear: not only are employees automatically enrolled into pension schemes, but their money is protected from excessive charges, and finally, their pension is handed back to them to invest or save or spend upon their retirement.

It is evident that Webb was passionate about the importance of pensions. During his time in Parliament he certainly made a string of bold and decisive moves; but the reforms put in place clearly show that he understood the nuances of pension policy.  Even though Webb is no longer the Minister for State and Pensions, he will be remembered as having an extremely positive impact on the UK pensions industry and is sure to be a very tough act for Altmann to follow.

Mark Howlett
CEO

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

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[1] https://www.gov.uk/government/ministers

[2] Population ageing: statistics house of commons library

[3] https://www.gov.uk/government/policies/helping-people-save-more-for-their-retirement-through-workplace-pensions

[4] http://www.cityam.com/213081/pension-changes-april-2015-five-things-you-need-know

[5] Gov https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332714/pensions_response_online.pdf

[6] http://citywire.co.uk/new-model-adviser/news/labour-calls-for-pensions-cooling-off-period-to-stop-scams/a808009

[7] http://www.theweek.co.uk/budget-2015/62997/pension-changes-will-they-come-back-to-bite-britain

[8] http://www.ipe.com/countries/uk/uk-minister-dismisses-auto-protection-as-politicians-clash-on-paternalism/10006953.article

[9] http://www.theguardian.com/money/2015/mar/02/fca-pension-fees-charges-cap-criticism

[10] https://www.gov.uk/government/news/an-end-to-rip-off-pension-charges-webb

For Sale - Annuity Policy. One Careful Owner.

After several weeks of speculation, the Treasury yesterday released its "consultation" on selling annuities (available here). Indeed, the Government seem to prefer to call it a "call for evidence" - which is a bit like saying that it's an idea that George Osborne came up with one evening, after a few beers in the pub with Steve Webb (although Osborne doesn't strike me as a beer type, perhaps it was a few glasses of claret), which still needs to be fleshed out a bit.

The document makes it pretty clear that there's an awful lot of important detail that hasn't really been worked out. For example, the Government still seems undecided about whether to allow annuity providers to “buy back” annuity policies from policyholders, as an alternative to selling an annuity to a third party. The Government is clear that “consumer protection” is required, but the nature of that protection is unclear. Fundamentally, if you are selling your annuity, the advice you need is whether the sum you are offered is a good deal, which boils down to whether the party buying your annuity thinks you are in better health than you really are.

Practical problems - like how to work out when an annuitant dies, if the annuitant no longer has an interest in the annuity policy - are flagged, but the Government doesn't seem to have a clear view on how to solve them.

The Government seems to want to make the sale of an annuity to a third party subject to the agreement of the annuity provider. Now why would an insurance company agree to this? The risk for the insurer is that they overpay on the annuity policy because the new owner of the policy has no idea whether the annuitant is alive or dead. So I anticipate that insurers will be reluctant to agree, unless they can charge a fat fee for the pleasure of doing so - which may simply mean that the option to sell an annuity becomes prohibitively expensive.

Notwithstanding this lack of detail, the Treasury is optimistic enough to budget over £500m in extra tax revenue (in the first year alone) as a result of annuity sales. This must assume that not only will annuitants sell their policy, but that they will also take the proceeds more quickly than would otherwise be the case, thus accelerating tax revenue. There is a certain irony about this - in the introduction to the consultation, the Government says that it "believes that for most people, keeping their annuity income will be the right decision" - yet clearly the Treasury think that enough people will make the "wrong" the decision to give them a significant tax revenue hike.

Ultimately, this half-baked policy feels like opportunistic electioneering – the vagueness of the consultation gives the impression that, post-election, it might quietly be kicked into the long grass, to wither and die.

John Broome Saunders

Actuarial Director

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

Auto-enrolment – No Minister!

The Pension Regulator (tPR) published its first in-depth analysis of the initial implementation of auto-enrolment a few months ago. 

It revealed that in July it had launched investigations into 89 employers for possibly failing to comply with the Government's new rules, issued 38 warning letters and one enforcement notice. 

If large companies have struggled to understand the complexities surrounding the new legislation how many medium and small employers are likely to fall foul of the Regulator when it's their turn to stage?

A year on from the launch of auto-enrolment we will begin to see the volume of employers hitting their auto-enrolment staging date rising dramatically with many having little or no experience of workplace pensions. In May 2014 alone 12,000 employers are scheduled to stage with the vast majority having a fraction of the resources available to them that larger employers, who have clearly struggled, have had at their disposal.

Against this backdrop the message from Steve Webb, the Pensions Minister, has consistently been that the auto-enrolment regime has been set up so that ‘nobody needs to pay for advice’ and that the government has ‘legislated for quality’ particularly with the default option that the National Employment Savings Trust (NEST) has been designed to provide.

Our experience to date strongly suggests this is not the case. BROADSTONE’s view is that it is totally unrealistic for employers to plot a path through auto-enrolment without guidance from an experienced advisor. As the number of employers looking to stage increases sharply this will inevitably place a strain on advisors capacity to assist leaving short supply (and potentially increased fees) for employers that leave it late.

So sorry Minister we would strongly advise that employers seek to engage with an advisor as soon as possible rather than attempt to navigate their own path through auto-enrolment. This will avoid a rushed (or failed) implementation and the potential to fall foul of the Regulator.

If you’d be interested in discussing how we can help you please contact me.

Mark Howlett

CEO

Telephone: +44 (0)20 7893 3456

Email:  contactus@broadstoneltd.co.uk