Pensions, platforms & regulation
Andrew Palmer, Head of Regulatory Change at Bravura Solutions reflects on a year of reform and looks forward to 2015
The Chancellor’s Autumn Statement last week didn’t deliver anything as revolutionary as the reforms announced in his March budget, but there were a few early Christmas crackers around ISA rules. After a monumental year, let’s look at some of the highlights and impacts, and explore how things are shaping up for the future.
The powers that be
Looking back over 2014 it’s fairly easy to pick out the standout event that has breathed new life into the retirement industry over the last nine months and will continue doing into 2015 and beyond. George Osborne’s surprising overhaul of UK pensions announced in the March budget has provided plenty of challenges for those implementing the necessary changes in time for April 2015, but also a tremendous opportunity for platform providers; a perfect storm some would say.
One of the fundamental pillars of the reforms will see pension savers given new freedoms to cash in or drawdown their pensions instead of being forced to buy annuities, previously life insurers’ most lucrative products. The huge drops in individual annuity business have been staggering, 50-60% in some reported cases. With Standard Life forecasting that 30% of retirees will opt for drawdown, compared to 6% of retirees today, the last nine months has seen life insurers exploring the opportunities available to them. This includes launching their own platforms offering drawdown functionality and a number of product innovation initiatives.
Whilst the budget reforms have tended to dominate the domestic agenda, regulations from continental Europe and beyond continue to make their presence felt. FATCA (Foreign Accounts Tax Compliance Act), the US legislation designed to counter US tax evasion by identifying US account holders of non-US financial institutions, has had a significant impact on the investment management industry. Reporting is due to start in March 2015 for the year 2014 and we have been working with our clients to ensure compliant returns can be submitted on time.
Next year is also expected to see the new OECD developed multilateral tax information exchange program come into force, with the exchange of information likely to start in 2016. With its origins in FATCA, the G20 group of countries mandated the OECD to develop a framework that tackled international tax evasion in a way that minimises costs for both businesses and governments.
In March, HMRC published the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014, outlining the obligations of reporting financial institutions in relation to the UK agreements with the Isle of Man, Jersey, Guernsey and Gibraltar. While broadly similar to the requirements under FATCA, there are subtle differences.
Further legislation to concentrate the mind includes MiFID II. Around 90% of fund platforms in Europe are driven by a revenue sharing model. However, this historical model will be challenged under MiFID II. Political agreement was reached in March that will implement a ban on inducements for independent financial advisers. The proposal is for a Europe-wide ban on payments made from product providers to financial advisers, similar to measures already in place in the UK under the RDR. It is anticipated that implementation of MiFID II will be in 2016.
In addition to this, other European directives and legislation include PRIPs, UCITS V, T+2 settlement and Solvency II, with undoubtedly more to follow. What is abundantly clear is that the steady stream of regulation will continue to flow from Europe’s policy makers.
The upcoming General Election in May will lead to the uncertainty that inevitably follows a change of Government, particularly with current polls pointing towards a high probability of a new coalition.
Despite initial reservations, it does appear that all political parties are committed to the pension reforms, if not the rather rushed implementation timetable. At the end of the day, the increased flexibilities are extremely popular, and politicians are obviously wary of anything that could see them lose votes.
In the wake of the Scottish independence referendum, The Smith Commission was announced by Prime Minister David Cameron. The commission was tasked with convening cross-party talks and agreeing recommendations for further devolution of powers to the Scottish Parliament. Published at the end of November, one of the recommendations includes the Scottish Parliament having complete power to set income tax.
These significant proposals could see platforms running a ‘dual tax system’ for investors north and south of the border. A bill is expected to be brought forward after the general election in May.
Heading into 2015 we can expect to see a number of developments. The vast majority of the new regulations that will come into force in the coming months will create a new paradigm that will cause a lot of the established players to redefine themselves.
Prior to the budget announcement the conventional annuities market was worth approximately £12 billion per annum, according to 2013 figures from the Association of British Insurers. The recently announced Aviva-Friends Life merger could be a sign of things to come and further consolidation may follow.
Despite the decline in annuities, for a huge number of those in retirement securing a guaranteed income will remain a priority. We expect to see innovation as providers offer new products that are designed to offer regular income payments that are guaranteed not to fall, but also rise if investments perform well.
As potential distributors of these products, platforms have the opportunity to be at the forefront of this innovation and the rewards are potentially huge. Towers Watson forecasts the UK at retirement market to triple to £50bn in 2023. It is also striking that this at/in retirement dilemma is a global issue. The recent Murray Inquiry in Australia has called for submissions on the retirement phase of superannuation with the country having a compulsory retirement saving but no decumulation structure.
As I digest the Autumn Statement, a few items have been clarified, others have not and one surprise has been unleashed.
First the good news. Towards the end of 2015 we can expect to see peer-to-peer lending made eligible for ISAs. Likely to take shape in the form of a new ISA wrapper ‘lending ISA’, it will add another string to the bow of platforms.
However, we are still seeking clarification on the final details of the pension reforms announced last March. It is expected that the Pensions Bill will gain Royal Ascent towards the end of February, only two months before implementation!
The one surprise was the Chancellor announcing that if an ISA holder dies, their spouse or civil partner will inherit the ISA benefits and they will be allowed to invest as much into their own ISA as their spouse used to have via an additional allowance, as well as their normal annual ISA limit. A consultation on these draft regulations will take place early in the New Year and the intention is to lay regulations before Parliament in time to come into force on 6 April 2015.
This ISA development, alongside the removal of the so-called death tax on pensions, brings the two savings vehicles closer together. Maybe next year I’ll be discussing the legislation for a lifetime savings plan.