Hargreaves Lansdown's head of pensions research Tom McPhail looks at the five biggest risks to pensions in the coming year.
1. Pension Input Periods (PIPs)
The Treasury has done outstanding work in simplifying pensions in recent months but in failing to scrap PIPs they risk undermining much of their good work. The problem with PIPs is not so much that they will catch out those pension investors with above average pension accrual, resulting in unexpected tax charges (though they will); the main problem with PIPs is with the new lower annual allowance, pension planning, investing, selling, managing and transferring will all be more complicated; unnecessarily complicated. All this in the year before auto-enrolment kicks off. The Treasury should work with HMRC to scrap PIPs and bring Annual Allowances in line with the tax year before it is too late.
2. D-Day: will the pension providers be ready?
On 6th April 2011 the new drawdown rules will take effect. This represents a tremendous opportunity to engage investors in pension planning however this benefit will be severely undermined if, as is now being predicted, many pension providers will not have their systems ready to deal with the changes. This will lead to disappointment and disenchantment and it's not as if it would be the first time pensions had had this effect on their supposed beneficiaries.
3. Test-Achats and the European Advocate General
At present it is legal for annuity providers to discriminate in their rating policy based on age, personal medical history, postcode, personal physical characteristics such as height and weight, and gender. The European Advocate General has ruled that gender based annuity rates constitute gender discrimination and should be banned. This case is up for appeal in the spring. If the appeal fails then UK insurers could be forced to rethink their annuity rating practices. Due to the phenomenon of localised ethnicity in some regions of the UK, particularly in major cities, postcoding could also be banned on grounds of racial discrimination. If this happened annuity rates would level down across the board; in simple terms men would lose more than women would gain and no one would be happy.
4. The failure of the NEST launch
NEST is due for a soft launch in 2011. We do not think it will have any problems but if it does it would significantly undermine investors' confidence in the current workplace pension reforms. We need NEST to be a success.
5. Public sector pension reform
John Hutton's review will report its recommendations in the spring. Public sector pension reform is overdue and necessary but that does not mean the unions will take it lying down. In picking a path of reasonable compromise between protecting the taxpayers of today and tomorrow and satisfying the demands and expectations of the public sector workers, Hutton had one of the toughest jobs in pensions. Expect angry headlines.
