It’s that time of year again, when one tends to reflect on what was and starts to think of the coming year and what might be. Here I share the developments and changes we saw in pensions throughout 2018 and I will be following it up with a post in the new year on my projections for 2019 – stay tuned for that one.
When the Digital team asked me to write this post, my initial vision was for a timeline of events in 2018. However, I quickly came to the conclusion that most of the events followed a central theme, so I’ve grouped each of the developments accordingly. I’m sure by the end of the post you’ll agree, it was another year of great change in our market and 2019 is set to follow along the same vein.
Consolidation and new entrants
Consolidation has been a constant in the SIPP market over recent years and this year has been no different as we saw the following transactions take place in 2018:
- February – Dentons buys Sippchoice
- May – Hartley Pensions buys Lifetime SIPP
- October – Embark buys Liberty SIPP
- October – Hartley Pensions buys Greyfriars SIPP and SSAS
- December – Curtis Banks buys Hargreave Hale SIPPs
A couple of new propositions also came to market in 2018, including:
- March – Robo-adviser Moneyfarm launched a SIPP, partnering with Embark.
- May – Investment platform 7IM launched its own SIPP
Ongoing issues in the SIPP market have persisted, which has driven the consolidation. However, the SIPP business model is changing, mostly driven by technology to provide low cost personal pension type SIPPs for the mass market. This has lead providers to consider building their own technological solutions, although acquiring and maintaining in-house expertise is challenging, so we are seeing a move toward strategic business partnering, including white-label deals.
Tax Year Changes
In April we welcomed the return of an increasing Lifetime Allowance (LTA), from £1m to £1.03m, in line with the Consumer Prices Index. The last time the LTA was increased was back in 2010 when it reached its panicle of £1.8m prior to a succession of cuts.
In April 2018 the Scottish Parliament used its powers to set different income tax rates and bands for Scottish resident tax payers. Whilst the same principles for obtaining tax relief on pension contributions applies, it is without doubt an additional complication for providers and makes it a more involved process to explain how much tax relief will be granted to individuals depending on where they live.
After what most would describe as a successful rollout of auto enrolment into workplace pension schemes, the programme continues with increased total minimum contributions from 2% to 5% in April 2018. There has been little evidence of individuals opting out to avoid paying higher contributions, although it was anticipated that most schemes would already have met the 5% minimum already.
Next April the overall minimum contribution increases again to 8%, which will be a bigger test regarding opt-out rates.
The State pension is currently the primary source of income for those aged 65+ and auto enrolment is on track to help people supplement this income and lessen their reliance on the State.
However, a program of change is underway. We have seen a phasing in of the equalisation of state pension age for men and women at age 65, achieved in November 2018. In early December, a phased increased up to age 66 began and will be fully achieved by April 2026. This will follow with a further phased increase to age 67 over the following two years.
With further increases planned, the message is clear that if individuals wish to avoid the necessity of continuing to work for longer they will need to reduce their reliance on the State pension.
HMRC Scheme Registrations
In April HMRC gained new powers regarding the registration and de-registration of pension schemes, to help combat pension scams. These powers allow them to refuse registration or de-register existing schemes in cases where the sponsoring employer is dormant.
Fears were expressed that this could impact many legitimate Small Self Administered Schemes (SSAS) if HMRC were to abuse these new discretionary powers. Consequently, pensions minister, Guy Opperman gave assurances that these powers would only be exercised where it is satisfied that the scheme is not being operated for the provision of legitimate retirement benefits.
To date there is no obvious evidence of existing SSASs being deregistered under these powers which is good news. However, registering SSASs has become a lengthy and time consuming process – often between four and six months – which does not bode well for small businesses that can really benefit from utilising these schemes.
The biggest news story in 2018 was undoubtedly the Berkley Burke case under which the Financial Ombudsman Service determined that the SIPP firm failed to carry out adequate due diligence on an unregulated collective investment scheme that subsequently failed causing loss to a client. Berkley Burke lost its High Court appeal in October on the basis that the judge found that the Financial Ombudsman, on it having wide powers of discretion to decide cases on what is fair and reasonable, had arrived at its decision within its powers.
That’s not the end of the story though, as Berkley Burke may seek a further appeal and a similar case involving Carey pensions has to be made public.
In the meantime, the FCA issued a ‘Dear CEO’ letter to SIPP providers saying that in light of the Berkley Burke case, firms should consider the implications, including the need to meet its financial obligations. The FCA advised it would begin contacting firms to discuss these issues.
I’ve grouped the following together, as they appear to follow along the same theme:
- New guidance body. In October 2018 the new single financial guidance body was formed by bringing together the Money Advice Service, the Pensions Advisory Service and Pension Wise.
- The Pensions Ombudsman. Regarding complaints, 2018 marked the full first year of operation by The Pensions Ombudsman (TPO) and Financial Ombudsman Service. Broadly, TPO deals with matters relating to the administration of occupational and personal pensions and FOS deals with issues of advice in respect of the sale or marketing of individual pensions. However, there can be overlap as FOS can consider administration issues relating to personal pensions but not occupational schemes. Furthermore, their modus oparandi differs in a number of ways but markedly in that TPO is governed by what is within the bounds of legislation whereas FOS has a wider brief to make decisions regarding what is fair and reasonable. This has raised concerns about differing outcomes depending on which ombudsman handles a case – a point raised in the Berkley Burke case.
- Complaints. Increasing complaints also made headlines in 2018. TPO reported a 19% increase in complaints, mainly around pension transfers. The FOS revealed what it categorises as SIPP complaints having increased by 77% – although this will predominantly relate to the advice given about SIPP products and crucially the investments held in the SIPP. Whilst disturbing to see, the increases in complaints are not unsurprising given the number of failed investments that have emerged over the last few years.
- FSCS claims. Likewise, the Financial Services Compensation Scheme reported a 7% increase in compensation paid out for SIPP related claims. Again, this was generally related to transfers out of occupational schemes into high risk, non-standard assets, many of which became illiquid and potentially insolvent.
- Pension scams. This issue remains high on the agenda and collaboration between the FCA and The Pension Regulator saw renewed efforts to combat it with a relaunch of the ScamSmart campaign in August. Prior to this, the Pensions Scams Industry Group issued an updated Code of Good Practice in June to assist pension firms in protecting against scams. Another welcome development has seen the implementation of the pensions cold calling ban which HM Treasury consulted and passed as legislation in December.
- Pension transfers. The FCA is prolific in issuing new regulations, but a stand out one for pensions relates to defined/safeguarded benefit pension transfers. Consultation in March lead to a policy statement in October, which brings in new requirements for Pensions Transfer Specialist advisers. This should bring about positive change in 2019 to ensure such transfers are advised appropriately, thus reducing subsequent complaints to FOS and FSCS claims.
- Retirement outcomes. Another FCA initiative in 2018 was its Retirement Outcomes Review and consultation paper CP18/17 proposing changes to rules and guidance, with the aim of aiding consumer protection and dealing with the ramifications of having ‘retirement freedoms’ but not necessarily the financial knowledge to use the flexibilities wisely to achieve good outcomes. This includes the prospect of pension firms having to provide drawdown clients with investment pathway options depending on a few defined objectives.
So overall, it’s been another eventful year in pensions – and I don’t anticipate the momentum slowing down in 2019.