Week ending 28 June: Latest Contracting out bulletin | Pension accounting changes | ABI action plan
Latest Contracting-Out Countdown Bulletin
The latest edition of the 'Countdown Bulletin: ending of Contracting-out' is now available. It focusses on frequently asked questions about the scheme reconciliation service and also
- reminds scheme administrators they must register for the reconciliation service by 5 April 2016;
- confirms there are no plans to extend the cut-off date for dealing with reconciliation queries past December 2018; and
- reminds schemes about the planned GMP micro service, which from April 2016 will allow schemes to request GMP calculations on a self-service basis.
Pension accounting changes
Proposed narrow-scope amendments to its pension accounting requirements have been published for public comment by the International Accounting Standards Board (IASB). The proposed changes are designed to improve information to investors and address some diversity in practice.
The proposed amendments to IAS 19 Employee Benefits specify that the entity is required to use the updated information to determine current service cost and net interest for the period followed by these changes.
The proposed amendments to IFRIC 14 IAS 19, ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ address how the powers of other parties, such as the Trustees of the plan, affect an entity’s right to a refund of a surplus from the plan.
ABI action plan to help customers get the most from pension freedoms
The Association of British Insurers has written to the Chancellor of the Exchequer and the CEO of the Financial Conduct Authority outlining an action plan to tackle the implementation challenges associated with the new pension freedoms. The key element of the plan is a proposal to create a new ‘customer control’ mechanism that will allow customers to access their pension pot without having to pay for advice.
Other key elements of the ABI’s Freedom and Choice Action Plan include:
- Establish a joint taskforce between the government, the regulators, providers and advisers to deal decisively with the remaining issues
- The FCA to conduct a broader review of the balance of responsibility between customers and providers in light of pension flexibility
- The FCA to set out clearly those products and circumstances where advice should be taken
- The Treasury to work with the FCA and Department for Work and Pensions (DWP) to clarify the definition and valuation of safeguarded benefits, by a change in the law
- Providers to work with the FCA and DWP to clarify the definition and valuation of safeguarded benefits, by a change in the law
- The government to publish Pension Wise data and restart marketing to ensure maximum take up of this valuable service
- The ABI and its members to start work on developing standardised language on products and charges to help customers consider their options
- The ABI and its members to ensure clear, consistent communications to customers on the products and services available.
Next generation of retirees expect to be worse off in retirement
According to research from Prudential, the next generation of retirees (those aged between 45 and 55) expect to be worse off in retirement by almost a fifth (18 per cent) compared with those leaving the workplace this year.
The insurer’s study revealed that people aged between 45 and 55 expect to work until they are 65 years old and estimate that their average annual retirement income will be £14,000 a year when the time comes for them to stop work.
In contrast, figures from Prudential’s study of the ‘Class of 2015’ – those planning to retire this year – show an expected average annual income of £17,000, leaving a generation gap in retirement income of £3,000 a year.
Just 27 per cent of the next generation of retirees, those aged 45 to 55, believe their pension will provide them with sufficient income to enjoy what they consider to be a comfortable life in retirement. This compares with 50 per cent of those planning to retire this year.
Majority do not want to cash in their annuity
Based on a YouGov survey commissioned by the Institute and Faculty of Actuaries, 55% of British pensioners would not want to sell their annuity for any reason.
The survey, conducted with people aged over 55 with an annuity, found that 48% of respondents value the certainty their annuity gives them, and 40% believe there is a high risk they could end up worse off by cashing it in.
Retirement saving reaches record high
Retirement saving in the UK has reached the highest level ever recorded, with 56% of the population now saving adequately, according to new research from Scottish Widows. However, 6.2m people are still not saving at all for retirement.
The Scottish Widows Retirement Report revealed that outside of pension savings, people are saving on average £142 a month towards their retirement, rising 8% from £130 last year. Almost one in five (19%) expect to save more over the next 12 months and 40% feel positive about their long-term financial situation, up from 37% last year.
For the first time in 10 years, the average proportion of earnings being put away each month towards retirement has reached the 12% recommended by Scottish Widows – more than twice the level in 2006 (6%) and a third higher than in 2013 (9%).
Despite the recent raft of reforms designed to shift retirement planning higher up the nation’s financial agenda, there has been no improvement in the number of non-savers since last year, with 20% of people – around 6.2million – not saving at all for retirement, the same level as recorded in 2009. A similar proportion of people have no savings or investments whatsoever, increasing from 17% last year to 19%.
The study of 5,000 UK adults highlighted a clear disparity between expectations of retirement income and the reality of how far savings will stretch. Whilst the average income Britons aged 30-65 believe they would need to feel comfortable in retirement is £23,469, people saving at the current average level can expect an annual income of £15,600 in retirement – an annual shortfall of over £7,800.
Early Indicator Estimates from the Wealth and Assets Survey
Preliminary estimates from the Wealth and Assets Survey show that:
- Employer-based pension schemes are considered as the "safest" way to save for retirement and confidence has been increasing, with 40% of individuals asked giving this as the "safest" option in the period July 2012 to June 2014, compared to 35% in the period July 2010 to June 2012, and 37% in the period July 2008 to June 2010.
- Knowledge surrounding "workplace pension reforms" increased substantially over the period July 2012 to June 2014. In the first quarter, July to September 2012, 40% of those asked said they had not heard of it, compared to just 8% in the final quarter, April to June 2014, of the period.
- Investment in property, also increasingly seen as a safe way to save for retirement (second only to an employer-based pension), is regarded as the most likely method to "make the most of your money", with 42% of individuals asked
- Many people thought they would retire at an older age than previously, with 58% thinking they would retire at 65 to 69 in the period July 2012 to June 2014, up from 54% in the period July 2010 to June 2012. Over the same periods, the share of people who thought they would retire at 60 to 64 fell from 27% to 21%.
- Despite some indications of increasing confidence in pensions, in the period July 2012 to June 2014, 59% of individuals asked still said they were not confident of having enough income in retirement to maintain the standard of living they were hoping for.
Pensioners’ incomes series: financial year 2013/14
The latest research from DWP provides estimates and interpretation of trends in the level and sources of pensioners’ incomes.
- Chapter 1 provides an introduction to the publication and key background information
- Chapter 2 looks at the overall trend in pensioners’ incomes, as well as different groups of pensioners. It includes comparisons by age, singles and couples, and region
- Chapter 3 looks in more detail at various sources of income, including the percentage of pensioners who receive income from these different sources
- Chapter 4 looks at the distribution of pensioners’ incomes, both within the pensioner population and within the overall population (including the working age population)
- Chapter 5 sets out results for additional analysis, including couples where only one member is above State Pension age, married and cohabiting couples and ethnic groups.
TPR survey on DC quality features
The regulator has published its 2015 survey into the presence of the defined contribution (DC) quality features amongst trust-based schemes.
The features set out in the regulator’s DC code of practice are designed to help trustees to run their scheme to a high standard, so that they can deliver good outcomes for retirement savers.
Every master trust and 88% of large schemes surveyed displayed a good knowledge of the quality features. In contrast, 74% of small DC schemes and 48% of medium ones have little or no knowledge of the quality features; while only 59% of medium and 39% of small schemes have been reviewed against the features.
There was a similar pattern relating to the April 2015 introduction of new minimum legislative governance standards, with master trusts and large schemes showing the highest awareness of the changes, which came into effect shortly after the survey was conducted.
The survey showed that the areas with greatest scope for improvement related to trustee knowledge, investment strategies and administration systems.
The regulator has worked closely with the government on new legal minimum governance standards for DC schemes relating to these areas, which came into effect in April. Trustees must report in their annual chair’s statement how they have ensured that core financial transactions have been processed promptly and accurately, how they have ensured their default fund offers value for, and is appropriate for, their particular membership, and how they demonstrate sufficient knowledge and understanding to run their scheme.
The regulator will be running communications campaigns to trustees over the next year focused on raising awareness on the new minimum governance standards and areas where the latest survey indicated weaknesses in DC governance.
The regulator has begun the process of updating its DC code of practice (in place since November 2013) to take account of recent changes in the law and is discussing with the industry how it can make the code shorter and simpler to apply.
The regulator is also working with the government and Financial Conduct Authority on the implementation of new pension flexibilities, introduced in April, and will be visiting schemes during the summer to hear what they are doing to adapt to these major changes.
Commons Briefing Paper on Pension Flexibilities
A new Commons Briefing paper (SN06891) has been published which looks at the rules which came into force in April 2015 giving people more flexibility about when and how to access their defined contribution pension savings.
LV= and Treasury launch pension passport pilot
LV= have teamed up with the Treasury to create and trial a pension passport to boost consumer engagement with the retirement income market. The pension passport is a simple document outlining how much an individual has in their pension pot, in what type of scheme and any special terms such as guaranteed annuity rates their pension attracts.
>LV= have been working with the Cabinet Office’s Behavioural Insight Team to ensure that the information provided is sufficient enough to encourage pension savers to shop around for the right solution or combination of solution for their needs.
The pension passport is currently being sent to customers approaching retirement in place of the current wake up packs.
FCA paper on smarter consumer communications
The FCA has published a discussion paper on smarter consumer communications (DP15/5).
The discussion paper is intended to trigger a debate around how the FCA, industry, consumer groups and other stakeholders can work together to deliver information to consumers in smarter and more effective ways.