With pension reform comes opportunity and uncertainty
The changes to the pension tax rules announced at the 2014 Budget will completely reform both pension savings and retirement products, not least in the way that new products and services will need to be developed and regulated. The intentions behind the changes should be applauded: more freedom, flexibility and control over how defined contribution pension assets are accessed.
So just as we are starting to get to grips with transitional arrangements and looking forward to a new pensions landscape post April 2015, enter the Private Pensions Bill. The Bill, which received Royal Assent last month, announced an even wider choice though the introduction of defined ambition pensions. These will encourage greater risk sharing and arguably provide for more certainty than direct contribution personal pensions. In essence, this is something of a halfway house between direct contribution personal pensions and defined benefit occupational schemes.
Defined contribution pensions, where individual scheme members bear all of the risk, currently dominate the UK pensions market. This can be the right product for many savers but outcomes will be less certain than those with defined benefit pensions, where the employer bears the risks by promising a pension usually related to salary.
The Pensions Bill would establish three mutually exclusive definitions for each type of scheme based on the degree of certainty around the benefits each scheme offers to members. In essence, schemes would be defined in terms of the type of “pensions promise” they offer to individuals as they are paying in – full promise about retirement income; a promise on part of the pot or income; or offering no promise at all.
Change brings both opportunity and uncertainty. As such there will always be the potential for misinterpretation or abuse. It’s clear that the industry has to embrace a new pensions landscape. However, increases in the regulatory burden – intended to protect for consumers – often come hand in hand with an increase in costs. If these costs are passed on to the consumer, as they have been in the past, it will outweigh any cost savings associated with product innovation.
Ian Stott is client services director at The Consulting Consortium.