The Financial Services and Markets Bill was included in the Queen’s Speech today, and experts say it will repeal EU financial services regulation and replace it with UK-specific legislation.
This will involve changes to Solvency II, which are now being discussed. Solvency II specifies the amount of capital that insurance companies must hold and the sorts of assets they can invest in. An increase in annuity rates, which have already been rising in recent months, could be boosted further if the rule is relaxed.
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey says: “Today’s Queen’s speech didn’t provide much relief for people struggling with the soaring cost of living but there is a glimmer of hope on the horizon for those wanting to include annuities in their retirement income strategy.
“Solvency II reform is already subject to ongoing consultation and the inclusion of a Financial Services and Markets Bill today adds further momentum by aiming to revoke EU regulation governing the industry in favour of a more UK-specific approach.
“Its introduction in the aftermath of the global financial crisis was designed to make sure insurers were well capitalised but was met with concern that it would depress annuity incomes. The ongoing government review said reform could result in a material release of as much as 10%-15% of the capital currently held by life insurers unlocking the potential to invest billions of pounds in long-term assets. Such change could lead to a bounce in incomes which have already been on the rise in recent months as interest rates increase.
“In April 2021 a £100,000 pension pot would get you a single life level annuity income of £4,882 a year. Now you could get an income closer to £5,700 per year. This is still some way off the highs seen before the global financial crisis, but further increases will make more people willing to consider them as part of their retirement income strategy. However, it’s worth pointing out that further rises are not guaranteed.
“If you need a guaranteed income then it could be a good idea to annuities in slices over time, rather than all at once, depending on your need. This means your pot isn’t completely exposed to annuity rates at any particular point and you can potentially benefit from higher rates in future through an enhanced annuity.”
Aegon pensions director Steven Cameron says: “The inclusion of the Financial Services Bill, coupled with the Brexit Freedoms Bill, in the Queen’s Speech paves the way for helpful changes to how financial services are regulated and in turn the services firms can offer to customers.
“As we face the cost of living crisis, individuals will need more support than ever to make the most of their finances. Many already benefit from financial advice, but for some this may be disproportionately expensive. Current rules make it very difficult for firms to offer anything between generic information and full regulated advice. As we adjust to a UK outside of the EU, there’s an opportunity to move away from EU regulations and open up new forms of support, allowing the financial services industry to help more people. We’re strongly in favour of regulated firms being able to offer a more personalised form of guidance, which would nudge them in a positive direction, acting in their interest, without recommending any specific product.
“Helping customers with the cost of living squeeze is at the heart of the Government’s agenda. Changing regulations to allow new forms of support in managing finances and financial futures would be a big help here, with the added benefit of having zero cost to Government.”
Cameron adds: “There are growing signs that the government is ramping up efforts to take advantage of Brexit by reviewing rules we ‘inherited’ from the EU and replacing them with new approaches which work better for the UK and its citizens.
“Rules put in place at EU level mean regulations limit how much support firms can offer to those who are not prepared to pay for full ‘regulated advice’. We’d welcome changes here. Allowing more personalised forms of guidance alongside advice would free up firms to offer enhanced support to customers, not just to help them plan for their retirement, but when making other important savings and investment decisions.”
AJ Bell head of retirement policy Tom Selby says: “The introduction of the Consumer Duty has the potential to transform UK financial services for the better. By moving from rules-based to outcomes-based regulation, firms should be able to focus more on introducing interventions and prompts that help customers make better financial decisions.However, the effectiveness of this regulatory shift risks being undermined by the lack of clarity over the advice/guidance boundary. This lack of clarity means firms who do not wish to offer advice tend to steer well clear of anything that brings them close to the regulatory perimeter.
“As a result, millions of non-advised customers are receiving less support than might otherwise be the case, meaning they are more at risk of making poor saving or retirement decisions. The new Financial Services Bill provides a legislative platform to rethink that paradigm. Addressing this issue would fit neatly into the Government’s flagship ‘levelling-up’ agenda, as it is those on lower incomes who cannot afford advice who most benefit from guidance. If guidance could be beefed up, non-advised savers would be in a better position to achieve their long-term goals.”
“Confirmation Solvency II will be reformed will undoubtedly be trumpeted as a Brexit dividend for the UK, with the implication being that insurers will be subject to less stringent regulatory requirements – in particular in relation to the capital they have to hold in reserve.This could be good news for customers if lower regulatory costs are passed on in lower charges or better rates. However, the obvious counter to that is if consumer protections are lowered then there could be a greater risk of detriment should a firm run into difficulties down the road. There is also, of course, the possibility benefits will be swallowed up in higher profits or shareholder dividends.
“Alongside this, the Government wants to require regulators to focus on both growth and international competitiveness when policing UK firms. The key here is ensuring balance, protecting consumers from bad actors while not standing in the way of firms trying to innovate for the benefit of savers and investors.”
PLSA director of policy and advocacy Nigel Peaple says: “Given the short-term challenges faced by the country, especially the cost-of-living crisis, it is understandable that the Government did not announce today in the Queen’s Speech measures to enhance workplace pension saving as identified by the 2017 Automatic Enrolment Review. It concluded that workplace pension saving should be marginally increased by introducing saving from the first pound of salary and extending auto-enrolment so that it covers 18- to 21-year-olds.
“The Government has committed to introduce these measures from the “mid-2020s” and, as employers need time to prepare, it would be good to put this on the statute book now with a gradual and clear timetable for the introduction of the measures. The PLSA believes that it would also be desirable for automatic pension saving to be increased further, but not before the end of this decade, and for automatic enrolment pensions to be “levelled up” so that employers pay the same as employees.”
Phoenix Group head of climate change Tim Lord says: “The proposed Energy Security Bill can play an important role in delivering a clean and secure energy system for the UK. By deploying technology rapidly and at scale, the UK will be able to reduce its dependence on fossil fuels, reduce energy costs for consumers, take a lead in the growing sectors of the future and accelerate the transition to net zero.
“This transition provides huge opportunities for investment and, as the UK’s largest savings and retirement provider, Phoenix Group is committed to working closely with government to ensure that capital can be directed at the scale and pace that is required, while continuing to prioritise and protect the needs of our policyholders.”
Royal London director of policy and external affairs Jamie Jenkins says: “As anticipated, there was little in the way of pensions news in the Queen’s Speech. In practice, there is no shortage of activity on pensions with a national awareness campaign starting later this year, followed by the launch of the first Pensions Dashboard in 2023.
“However, we do need to consider how we build on the success of automatic enrolment, which reaches its 10-year anniversary later this year. The recommendations of the 2017 review – removing the Lower Earnings Limit on contributions and reducing the minimum entry age to 18 – have still to be firmly planned. It looks increasingly unlikely that this will be implemented by the mid-2020s target.
“Beyond that, we need to give employers and employees notice if we are to move contribution rates up from their current 8 per cent level, a move which now seems to carry widespread consensus. The cost of living crisis we face today is rightly the focus of attention for now, but we face a bigger cost of living crisis in later life if we don’t start to address the adequacy of pensions saving soon.”
Institute and Faculty of Actuaries president Louise Pryor says: “We are disappointed that the Government has not committed to a clear timetable for the reform of actuarial regulation in the Queen’s Speech. However, we are hopeful the proposed draft legislation will be published shortly. This will, at least, keep progress moving on reforms to the Financial Reporting Council and actuarial regulation.
“Actuaries are essential to a well-functioning financial system. The work they do on a daily basis in the public interest ensures that people receive the pensions they are entitled to, that insurance products are priced accurately for customers and that companies hold sufficient capital to pay claims to their customers. We look forward to continuing our engagement with Government on this important issue to ensure future regulation does not negatively impact our members and, more importantly, the public at large.”
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