London, 15 December, 2014 – Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON), says 2015 will see the biggest overhaul for the pensions landscape in generations.

The Aon Hewitt Pensions Calendar outlines the key dates for 2015-16, the most significant of which is Pensions Freedom Day on 6 April 2015.  After this date, DC members will be able to take all their pension as cash with 25% tax free and 75% taxed at their marginal rate of income tax.

Aon Hewitt 2015-2016 Pensions Calendar

December 2014/January  - Royal Assent on Taxation of Pensions Bill
January  - FRS102 replaces FRS17 as the UK pensions accounting standard
End of January -  Royal Assent on Pension Schemes Bill
Early 2015  - Revised Pensions Directive
Early 2015  - EIOPA to publish draft technical specs for Holistic Balance Sheet
March - The Budget
April  - DC charge cap and governance requirements become effective
April  - Contract based arrangement require Independent Governance Committees
6 April  - Pensions Freedom Day
7 May  - General Election
Mid-year  - Post-Election Budget?
Mid-year -  EIOPA to report on transferability of pension rights
October - Short service refunds abolished for DC
October  -  PPF draft levy determination
End of 2015  - GMP equalisation
April 2016  - New State Pension and the end of contracting out
April 2016  - Possible new income tax rates for Scottish members

Pensions Freedom Day
Sophia Singleton, DC consultant and partner, said:

“The flurry of activity required for pensions freedom will still continue after April 2015 - everything will not be ready and available on Day One. Our research has shown that only one in 20 of trust based DC schemes will offer a full range of cash and drawdown options in-house, while over half will negotiate better terms for their members with a chosen investment manager.  About a third of schemes will leave their members to investigate the open market on their own.

“We expect that in the short term, many members will have to go it alone as the market continues to evolve. As the year progresses and sensibly-priced products and guidance emerge, trustees and employers will start to steer members towards these solutions. However, what schemes can provide in the short term is access to new investment options which suit their members. During the first half of the year, we expect that many trustees and employers will be designing their strategies to meet their members’ diverse needs.

“Finally, we expect that employers and trustees will significantly increase their communication with scheme members to guide them through the new choices available.  Our research found that members are likely to seek help with their planning from a variety of sources. However, the very high proportion of DC members who currently invest in the default investment option probably indicates that members do not actively engage with their schemes before retirement. Best practice will be for schemes to offer guidance to members long before retirement and to regard the Guidance Guarantee as only one part of the education process to help members make better decisions when they retire.”

DB schemes
Ben Roe, head of liability management, said:

“2015 is shaping up to be the ‘year of the transfer value’ as we expect to see a significant increase in the number of DB members who transfer from DB to DC arrangements to take advantage of the new pension flexibility.

“We have already seen a three-fold increase in the number of transfer requests with some clients. With Pensions Freedom Day less than four months away, many companies and trustee boards have been working to amend retirement processes to deal with the expected increase in demand for transfer values from April 2015.

“A recent Aon Hewitt survey suggested that around 25% of Aon Hewitt clients with defined benefit pension schemes have already taken actions to revise their retirement process in advance of April 2015. In most cases this involves providing members with access to individual transfer value quotes in retirement packs on an ongoing basis. The changes need to be communicated carefully to make sure that members are able to make an informed decision on the options available.”

Predictions for 2015 markets
Tapan Datta, head of global asset allocation at Aon Hewitt, said:

“We are entering a much trickier time in markets with headwinds for investors coming from both valuations and macroeconomic developments such as the beginning of the end of zero interest rates.

“The combined effect of all this is likely to be a period of much lower returns.  With some pick up in volatility, risk-adjusted returns in portfolios will probably be surprisingly slow.  Pension schemes will need to find other ways to earn their target returns as markets will not be bringing them - let alone at reasonable levels of risk. The hardest part will be for schemes to lower their return expectations. Once this has happened, much can be done to insulate portfolios from these trends.”

We would offer three pointers for protecting and enhancing portfolios:

• Keep a relative value bias and favour cheaper assets – ultimately this will protect portfolios and add value against your strategic benchmarks.
• Favour asset classes that are more insulated from the valuation excesses in liquid markets - commercial property and infrastructure investments fit.
• Use investment approaches that will provide some protection against adverse market trends and an upsurge in volatility – this is a time when non-directional hedge fund strategies and other ‘tail-risk’ protection will really help.

Risk Settlement in 2015
Martin Bird, head of risk settlement at Aon Hewitt, said:

“2014 proved that even the very largest of pension schemes can settle risk – with record-breaking deals in both the bulk annuity and longevity swap markets. 2015 looks likely to follow suit, with several factors helping schemes to exploit settlement opportunities and achieve pensions stability.
 
“Drivers for continued activity include greater innovation, increased annuity market competition as providers look to replace lost individual annuity market business following the Budget announcements, and increased take-up of medically underwritten annuities. Add to this improving market conditions, competitive market pricing, a deepening of available CPI linked assets to support transactions and an increasing corporate appetite to off-load risk, and we predict 2015 will break all records again, with total bulk annuity sales reaching £15 billion.
 
“We expect to see more than £20 billion of longevity risk being hedged during 2015.  We expect further innovation at the mega-scheme end of the spectrum following the examples of Aviva and BT. The market will continue to open up to much smaller schemes too. The first mid-market (£50 million+) deal will take place, and we expect this area will really gain momentum. We also expect to see many insurers looking to make use of longevity reinsurance capacity, either to support pension scheme deals or as the insurance market rebalances its books in light of Solvency II.”

Governance in 2015
Paul McGlone, partner at Aon Hewitt, said:

“Trustees regularly tell us that they struggle to find the time to stay on top of everything. It's therefore not surprising that many schemes are missing opportunities. Often it is because trustees are so tied up in the day to day running of their schemes that they don't find time to step back and consider the latest issues. The answer is the old adage "work smarter, not harder". If trustees, sponsors and advisers can refresh the way that they work then we believe that the current challenges can be faced head on.

“During 2015 we expect governance to be a hot topic. It's a word that means different things to different people, and can be a turn off for many. But issues such as how trustees organise themselves and their time are crucial to dealing with ongoing pension challenges and bringing much-needed stability to DB schemes. That's not always simple to do – otherwise schemes would have done it already – but it is important.  Good governance takes time, but bad governance takes longer.

2016 - the end of contracting out
James Patten, head of pensions benefit design at Aon Hewitt, said:

“From April 2016, when contracting-out ends, employers still offering DB accrual will see their National Insurance (NI) costs rise by around 2.5% of DB payroll, with the employees’ NI costs also rising. In response, we expect that around 60% of private sector organisations currently offering DB accrual will be making changes to their benefit terms.

“In around half of these cases, the company will make changes that involve purely passing on the increase in NI costs to the members. This could be difficult news for employees if it leads to members contributing an extra 2.5% of salary as well as seeing their own NI contributions rising, particularly in the current low wage growth climate.

“In the other half of these cases, employers will be making more radical changes to their schemes and going further than simply mitigating the extra NI costs - most commonly by closing to DB accrual altogether but also by moving to DC or one of the new options for risk sharing set out in the Pensions Schemes Bill.”

Media Contact:
Colin Mayes                                      Marina Jane-Sanchez
Aon Hewitt                                        Capital MSL
01372 733689                                    020 3219 8811
colin.mayes@aonhewitt.com               marina.jane-sanchez@capitalmsl.com
 

Notes to Editors

About Aon Hewitt
Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness.  Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.  For more information on Aon Hewitt, please visit www.aonhewitt.com.

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About Aon
Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon’s global partnership with Manchester United.