Atkin trustees, actuaries, consultants & administrators

Budget 2014 - Short term populism or new dawn?

Whilst I applaud the idea of allowing people more access and control over their own money it seems rather obtuse that we are using psychological parlour tricks to get people to save under auto-enrolment then, when they reach age 55, telling them ‘here’s your money do what you want with it’. Depending whether my glass is half full or half empty, it is either an idealist move where people are trusted to govern their own affairs or it is a short term, populist move which will temporarily boost tax revenues (as members capitalise their pension pots early which the Government assumes will raise £1.2 bn in 2018/19) which could have far reaching unintended consequences.

On a good note, this should put the providers under pressure to innovate and provide more flexible and competitive products – if they survive, with some of the impaired life annuity providers seeing their share prices fall by 75% compared to where they were before the Chancellor stood up to make his speech yesterday. However, with all the restrictions Solvency II places on insurers in terms or reserving and investment strategy, it is hard to see how these will ever look especially attractive. The alternative is for people to manage their own money without the advantages of pooling risks (particularly that they might run out of money) and assets (reducing costs and increasing the range of asset available). From an economic perspective, you have to wonder whether this money will be invested as efficiently as it could be and who will pick up the pieces where people do run out of their pension pots early. Will massive amounts of cash languish in bank accounts being eroded by the effects of inflation? Will we see more low risk investment products developed to target these funds? Will we see more Ponzi schemes or ‘structured products’ that will convince pensioners to hand over their pensions savings for a seemingly guaranteed rate of return that is inevitably too good to be true.

With my advisor hat on, this is potentially great news for companies, who may be able to rid themselves of a vast chunk of their DB liabilities at a cost significantly less than buy out. Although, the Government is intending to consult on whether to make transferring from a DB to a DC scheme more difficult or prevent it entirely as they are intending for the Local Government Schemes (and I assume all those admitted bodies that participate in them). Given this has yet to come to pass, members may have only a small opportunity to transfer. To ensure that members understand fully the implications (and reassure the Trustees), we would recommend that the company volunteer to fund some form of independent financial advice as part of any exercise. The budget has taken everyone by surprise, the TV and airwaves are filled with people at, or near, retirement asking what the changes mean for them. It is inevitable that members of DB schemes will be asking whether they will enjoy the same level of flexibility.

If no restrictions are placed on the ability to transfer from DB to DC schemes, Trustees and Companies will need to consider what impact this will have on their anticipated cashflows. For instance, if the majority of members start to transfer out at retirement this significantly shortens the term over which the scheme will be invested and there is a danger that it may start to capitalise its losses.

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I have worked on a number of schemes with Atkin Trustees Limited and with Richard Bryant in particular. I found them to be a very organised team who focus on achieving practical and cost efficient solutions.

Michael M Jones, Partner, Charles Russell LLP