PRESENTER: To give us the trustees’ view of flexibility and choice in pensions, we’re joined by Adrian Kennett, who is a Director of Dalriada Trustees. Adrian, just begin by explaining the main changes that came about through the March 2014 Budget.
ADRIAN KENNETT: The main changes brought out in the Budget were the removal of the requirement to annuitise in DC scheme.
PRESENTER: That was pretty revolutionary wasn’t it?
ADRIAN KENNETT: I started in pensions in 1993, and aside of the ‘95 Pensions Act after Maxwell that was probably the biggest change that there has been over those 20 years of working in pensions. It was the removal of the requirement of annuitise in DC schemes. There was within the Budget around whether DB schemes, there was going to flexibility allowed for continuation of transfers from DB to DC schemes, so that was thrown out for consultation, and there was also the main thrust of the Budget around was the guidance guarantee, so individual members would have a right to free and impartial advice provided by an external party to the trustees at that point.
PRESENTER: Do you think that was really thought through?
ADRIAN KENNETT: Do I think it was thought through? I think there may have been a need for greater coordination between the Treasury and the Pensions Minister. I think some of the wording within the Act was obviously designed to be almost a tax generating mechanism, whereas that may not have been in line with what Steve Webb, as Pensions Minister, was after achieving.
PRESENTER: What were the reactions to, I remember most people in the pensions world being thoroughly shocked?
ADRIAN KENNETT: Yes, it was not foreseen. Every time these pension, there’s a lot of people that commentate on pensions, before the Act you get all of the blogs coming out saying well what can we expect to see in this Act? Very few people had predicted anything like this happening. So there were a series of fundamental changes made with effect from the 27th March. So that’s just a week after the Act. So rules around trivial commutation, flexible drawdown, capped drawdown, to try and phase in the changes that were coming in April 2015. So the removal of the requirement for annuitisation was coming, and there were a series of changes to try and smooth into that period, whilst consultations were launched around whether DB to DC transfers were still to be permitted, and precisely the tax environment in which it was to operate.
PRESENTER: Let’s take each of those sections, capped drawdown first.
ADRIAN KENNETT: The limits on capped drawdown were increased from 120% of an equivalent annuity up to 150%. If you go from flexible drawdown, previously you had to have a guaranteed income on flexible drawdown of £20,000; that was reduced down to £12,000. Trivial commutation allowance was increased from £18,000 to £30,000 from all sources. And the other trivial commutation change was from small pots, £2,001 up to £10,000, and the opportunity to take two was increased to three, so £30,000 in the round, three times 10.
PRESENTER: Okay, they were good things weren’t they?
ADRIAN KENNETT: They were unexpected things, things that caused trustees to think on their feet, things that caused trustees to search for the detail, because the Budget was published and then a consultation was issued. We know that the Act and everything that Steve Webb’s trying to do here has to be in place by the 9th May next year, and that leaves you as a trustee trying to think rapidly through right what are the implications for my scheme? So if you’re in a DC scheme what’s the investment implications if, most DC schemes have lifestyling.
So if the date at which the benefits are actually going to be crystallising and coming out is changing because there’s no longer a need to take it at normal retirement age, or the pace at which you’re going to take it is going to change, then you start to rethink investment strategies. You start to rethink administrative capabilities. Is your administrator ready for what could be a raft of transfer value requests? What does it mean for the future funding of DB schemes if DC schemes, sorry if transfers from DB to DC schemes are to be permitted? If a lot of members in a DB scheme are going to transfer out upon retirement, then that changes your investment profile within your DB scheme.
It also causes you concern from a trustee’s perspective. We’ve heard a lot recently from a trustee’s perspective about pensions liberation. Well if members can get their hands on more cash does that offer a new opportunity to those who are trying to carry out pensions liberation fraud? So you’ve got to go through, you find yourself as a trustee trying to think through all of the implications of the policy announcements that have been made, without particularly having the points of detail at the point at which you’re trying to make those decisions.
PRESENTER: Were the points of detail explained any better in the response to the consultation process that came out in July?
ADRIAN KENNETT: In late July the response to the consultation process was published, and the main point that that made was DB to DC transfers would continue to be permitted subject to the condition that anyone who had a transfer over £30,000 had to seek advice from someone who’s authorised to provide that advice. There’s still a significant amount of detail, particularly around the structure of the guidance guarantee, particularly around some of the tax implications, there’s a consultation paper out from the FCA around the guidance guarantee for example, so there’s still a series of pieces of the jigsaw at this stage missing and the clock is ticking.
If you think that the regs have all got to be in by general election next May, 9th May, then if you draw back from that and you’ve got people who are going to retire say next June, well they start to want to make decisions about what they’re going to do six months before that. So you need that detail about what you’ve got to tell them. Trustees have now got an obligation to signpost the availability of guidance. But as trustees we don’t know exactly what the nature or structure of that guidance is. We know we’ve got this obligation to signpost it four to six months before, you take June next year and roll back four to six months, then we are starting to need to need that information urgently, and those pieces of the jigsaw, some of them are still missing.
PRESENTER: At Dalriada, how many pension schemes do you look after as professional trustees?
ADRIAN KENNETT: We look after just over 100.
PRESENTER: So where are you in your planning, what are you saying to them?
ADRIAN KENNETT: In terms of the planning of the schemes, we’re in data gathering mode would be the best way of explaining it. so we’re trying to find out, we’re trying to study the population, trying to figure out from that population the likelihood of that population taking the flexibilities that are on offer, trying to look at those that will benefit from the changes in the commutation limits, trying to enter into discussion with our administrators around their capabilities to service the new flexibilities that are on offer, and trying to keep an eye on all of the legislation as it drops out to make sure that as those pieces of the jigsaw become available they’re slotted into place.
PRESENTER: Adrian, then what do you think are the long-term implications of these changes?
ADRIAN KENNETT: The implications of the changes could be vast. They could be minimal. Because no one actually knows how many people are going to take advantage of the flexibility that’s on offer. So within a DB population you don’t know how many people are going to transfer across to DC. The driver behind the changes was to try and more people to contribute to occupational pensions. Done correctly with strong governance, correct administration, communications etc., there is no doubt that more people will be attracted to the flexibility that’s on offer. But I think there’s two dangers. The first danger is that the industry doesn’t get it right, and that we highlight as an industry an increased flexibility and become more of a marketing spiel than a communication exercise done correctly, and secondly this is another change.
So occupational pensions, as I said at the beginning, have changed massively over the last 20 years. If you’re going to keep changing the rules of the game, then eventually people are going to start to switch off. Because if you take my situation, in my early 40s I've got 20 years to go until retirement at least probably. What’s the world going to look like? Well if the Government are going to keep moving the goalposts each time, then am I really going to want to engage in that process if I don’t have any certainty about the ultimate outcome?
PRESENTER: So what’s the point of planning now for something that you don’t even know what might happen in the future?
ADRIAN KENNETT: Every time the goalposts move I become less certain about what ultimately I’m going to be able to achieve through my pension saving, so why don’t I actually engage in an ISA or something that they’ve not modified to that extent?
PRESENTER: So there is a real danger here.
ADRIAN KENNETT: Yes, there is. Done correctly with communication and processes and governance, then the ultimate, there is a great amount of appeal as to flexibilities on offer. I've spoken to various members of schemes and just friends and family, and there is an active engagement in pension conversation, because people can actually see well I can get my hands on some more cash. But if getting the hands on that cash actually sees them lose some value along the way, a value that may not be overly apparent to them, then that could create bad news stories and engagement could decline.
PRESENTER: Adrian Kennett, thank you very much indeed.
ADRIAN KENNETT: Thank you.
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