Clearly, this has a knock-on effect for financial planners as they seek to take appropriate actions for their clients.
Hopefully they are able to advise clients of the dangers of stopping pension contributions and how detrimental this could be to their future retirement prospects.
Our research in 2022 showed that while many Britons have concerns over their retirement plans, they are unable to increase funding.
In short, current financial requirements are trumping longer-term planning. Sadly this is unsurprising.
So, what were the other big subjects in 2022 from a pensions perspective?
Liability-driven investments
Following the “mini” Budget in September, hares were set running among some defined benefit pension schemes that had adopted liability-driven investment strategies. This meant they needed to sell other assets to raise collateral.
The result of this was that many members of the public, understandably, were becoming concerned as to how secure their pensions were.
Given the headlines that were being generated at the time, it was not just members of DB schemes, but also holders of personal pensions, self-invested personal pensions, and so on who were concerned, even though they were not directly impacted.
Fortunately, the country’s economics seem to have settled a little of late, though there are suggestions that this has left some schemes with holes in their assets to meet future liabilities.
British Steel Pension Scheme
At the end of November, the the Financial Conduct Authority published the final rules for the British Steel Pension Redress Scheme, expected to compensate more than 1,000 members who wrongly transferred out.
The level of current interest rates has meant that redress payments may be less than they were a year or two ago.
As it now costs less to buy an annuity, the FCA now expects the average redress payout in the scheme to be lower than originally estimated, at £45,000 FCAAt the time of the release, the FCA said: “Redress is calculated based on the money needed to top up a personal pension, so the consumer can purchase an annuity at retirement that provides an income similar to what they would have received had they stayed in the BSPS.
“As it now costs less to buy an annuity, the FCA now expects the average redress payout in the scheme to be lower than originally estimated, at £45,000.”
The Dear CEO letter
On December 2, the FCA issued a ‘Dear CEO’ letter entitled ‘Portfolio strategy letter for financial advisers and intermediaries’.
This is well worth a comprehensive read; however, there were two points in particular I would pick out from a pensions perspective:
- It was confirmed that retirement income advice will be a focus for the FCA over the next two years as it seeks to explore how companies are delivering this and whether consumers are getting suitable advice. It plans to communicate further information on the specific work planned in the forthcoming weeks. Suffice to say now might be a very good time for advisers to review their centralised retirement plan and drawdown processes.
- It also re-emphasised that clients should receive value for money where an ongoing service is in place. It is difficult not to join this up with the previous bullet point and conclude that ongoing advice in drawdown could especially be a focus.
Regulatory focus
This year sees the introduction of most of the consumer duty rules and guidance, which will be one of the key areas of focus for the FCA in 2023 and beyond.
From a pensions perspective, and as identified earlier, drawdown advice is likely to be front and centre of this.
Advisers will need to consider all the risks in drawdown, and how foreseeable harm is being mitigated as much as possible.
Advisers may very well already have a very robust process in place, but they will also need to consider how this is evidenced in their annual report, and the collection of appropriate management information is key to this.
Further changes to the pension rules?
It is hardly a secret to say that government finances are under extreme pressure.
Given this situation it is not impossible to think that it might decide at some point to reallocate some of the costs of pensions to other areas.
What form could this take? Well, if it were to happen it could be further restrictions to the annual allowance, the lifetime allowance, pension commencement lump sums or something else.
The only surety we can give clients is that at present many of the rules around pensions are still relatively generous, and it makes good sense to use them for clients’ benefit where possible. Pensions are still one of the – if not the – best investments that can be made.
Looking ahead
Last year was the year in which we have been able to regain a semblance of normality following years of Covid disruption.
This has meant being able to catch up in-person with people we may not have seen for a couple of years – whether that be client meetings or attending conferences and events. In many ways I feel it has re-energised us.
As for the challenges ahead, we know that the financial pressures clients have faced in 2022 are likely to feed through into 2023 and, as has always been the case, when times are tough clients will look to the advice profession for reassurance, guidance and most of all help them with the longer-term strategies and focus needed to help manage their way through.
Vince Smith-Hughes is director of specialist business support at M&G Wealth
