One of the dominant pension stories of 2018 was the large numbers of people taking advantage of pension freedoms to transfer money out of their defined benefit pension scheme into another pension arrangement. Latest estimates suggest that around 100,000 people a year are transferring out, with average transfer values of around £200,000. Regulators continue to expect advisers to start from the position that, because of the certainty attached to DB pension rights, a transfer is unlikely to be in a member’s best interests. But there may be particular circumstances where a transfer makes sense and large numbers of people are continuing to take advantage of that freedom.
A key element of making the right decision about a transfer is taking high quality impartial advice, but early 2018 saw a scandal around the British Steel Pension Scheme where many steel workers said they had been preyed upon by unregulated ‘introducers’ who didn’t have the best interests of members at heart. A high profile Select Committee inquiry ensued and the FCA is currently gathering data on the entire market to stamp out bad practice.
On a more positive note, April 2018 saw a major landmark with the step up in mandatory pension contributions under auto enrolment from 2% to 5%, with a further rise to 8% due in 2019. With nearly 10 million workers having been successfully auto enrolled, the focus now needs to move from getting members enrolled to getting their contributions up to more realistic levels. Despite some scare-mongering, the step up in contributions passed by with remarkably little fuss and there was no evidence of large scale opt-outs when mandatory contribution rates were increased.
Budgets and Brexit
The world of pensions and investments is always affected by the decisions of the Chancellor of the day, and this year we had an early budget held in October 2018. The Chancellor was greatly assisted by a major revision to economic forecasts which meant his annual borrowing figures were far lower than expected. As a result, more unpalatable measures like a big change to pension tax relief were avoided. But with the Chancellor describing the cost of pension tax relief as being ‘eye-wateringly expensive’ it seems likely that further ‘salami slicing’ of the limits on tax relief can’t be far away.
The uncertainty around Brexit had its impact on the economy and on investment during 2018, but it also impacted Parliament’s ability to spend time on anything else. One important initiative which fell behind schedule during 2018 was the launch of a pensions dashboard where savers would be able to see all of their pensions in one place. A feasibility study was due in March 2018 but only finally appeared shortly before Christmas. Although this project is taking longer than expected, it should be of considerable value to savers to keep track of all of their pension rights, including state pensions and pensions from previous jobs all in one place.
Solving the long-term care puzzle
Another big outstanding policy issue remains the funding of long-term care. Despite more than twenty years of Royal Commissions and expert reviews, we seem to be no closer to resolving that challenge than we were at the turn of the century. The Government promised a Green Paper on social care in the summer of 2018 but (at the time of writing in early December 2018) it’s yet to appear. A key challenge will be finding ways of funding the growing cost of social care in politically acceptable ways. Royal London has been making the case for the role of insurance as part of the solution, with individuals able to use part of their accumulated pension wealth to insure themselves against needing to sell their homes to pay for care.
As ever, the biggest determinant of good pension outcomes is rarely the actions of governments or regulators but rather the health of the economy as a whole. Looking ahead, it’s the path of the economy post-Brexit which is likely to be the key determinant of the health of our pensions in 2019 and beyond, rather than anything which politicians may do.