This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Tom McPhail Head of Pensions Research for Hargreaves Lansdown, predicts what the next 12 months holds for the pensions market.
Next year, the Pensions Bill will make it into legislation, bringing with it a single tier state pension, higher state pension ages, tighter controls on auto-enrolment schemes and automatic transfers for small pension pots.
We’ll get costings for the purchase of additional, additional state pension (Class 3a) which will allow the purchase of up to an additional £25 a week of state pension on an ‘actuarially neutral’ basis – although this may not happen until 2015.
The Department of Work & Pensions will also announce the result of its charge cap consultation, which is likely to result in some controls being imposed on the pricing of auto-enrolment schemes, though possibly the implementation will be delayed for a year. This delay will be because we're also going it see a surge in employers going through their staging dates, 30,000 of them will have to comply with auto-enrolment in 2014 so if we can get to the end of the year without the wheels falling off, we'll have done well.
Workers should expect to see more focus on minimum standards for pension scheme, with both the DWP and the Pensions Regulator taking a sharp interest in making sure pensions are fit for purpose.
Consultancy charging on workplace pensions has already been banned; therefore it is possible we will also now see a retrospective banning of commission payments on existing pension arrangements.
The delicate tension in all these reforms is to maximise benefits to individual scheme members, minimise costs to the sponsoring employers and to do so without actually causing the pensions system to fall apart at the seams.
Defined Ambition will be on the agenda, following the DWP's consultation, though I think it is unlikely that many employers will show real enthusiasm to offer anything other than good defined contribution (DC) schemes.
The annual and lifetime allowances for pensions will be reduced in April, further limiting investors' scope to build up tax free retirement savings - down to £40,000 and £1,250,000 respectively.
Early in the year, probably January, we're going to get the results of the Financial Conduct Authority (FCA) thematic review into annuity pricing, which will hopefully reveal the true extent of consumer detriment in the annuity market. In particular we'll be looking to get a sense of how many people are actually buying annuities that are significantly worse than the best on the market. With a bit of luck we'll also see the FCA, Treasury and DWP finally get to grips with reforming the retirement shopping around process.
A rise in interest rates could bring some relief for final salary schemes, as it would reduce their liabilities, as well as pushing up annuity rates – or maybe we'll just lurch back into recession.
By the end of next year we'll be on full scale pre-election war footing so expect Labour and the Pensions Minister to be frantically trying to outdo each other’s credentials as the go-to guy for retirement savers.
In January the Pensions Income Choice Association will launch its retirement broker directory. This should make it easier for pension investors to shop around for the right retirement income and will be a mechanism to drive up standards in the retirement income market.
This is all the predictable stuff. Less predictable but quite likely events include misselling scandals, academic reports on the inadequacy of pension savings, final salary scheme closures and the odd public sector pensions strike.
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