Industry News category
HMRC unease over pension protection figures
Following the Government’s drastic decision to cut the lifetime pension allowance from £1.8m to £1.5m by April 6 this year, HM Revenue & Customs’ officials are surprised over the low amount of people who have applied to protect their pension fund.
Savers are required to apply before 6th April to retain the £1.8m allowance for their pension. Failing to apply for fixed protection will result in savings above £1.5m being taxed at 55 per cent, potentially costing investors hundreds of thousands of pounds.
The deadline for applying for fixed protection is dawning and as it falls just before the Easter bank holiday weekend advisers are being urged to send in the forms early to avoid potential delays.
Last November, Legal & General pensions strategy director Adrian Boulding warned that high-earners in group personal pensions could unintentionally lose their fixed protection as a result of differences between The Pensions Regulator and HMRC rules.
The introduction of automatic enrolment, which is due to begin from October this year, also presents possible problems for clients with fixed protection. Last August, official HMRC figures revealed that 18,000 people were at risk of losing their pension protection by inadvertently being automatically enrolled into a pension scheme as fixed protection is lost if further contributions are paid into the fund or benefits accrued.
It has been suggested by many that the Government should delay the dead- line for applying for fixed protection by 12 months due to concerns about advisers’ workloads resulting from the RDR and regulatory changes. Pushing the deadline back by 12 months would not burden the Revenue and would release pressure on the IFAs.
£50bn QE boost for UK economy
The Bank of England (BoE) has extended its quantitative easing (QE) programme to a total of £325bn.
In order to boost the UK economy, the Bank has decided to increase the QE programme by £50bn whilst the Bank’s Monetary Policy Committee (MPC) assures that interest rates will remain at their record low of 0.5%. The figure was brought down from £75bn of QE after economic surveys revealed that manufacturing and service sectors performed above expectation in January.
In a statement, the Bank said: “concerns remain about the indebtedness and competitiveness of some euro-area countries” despite figures showing that UK industrial production grew by 0.5% between November and December despite a forecast of 0.2%, and import prices fell by 1.3%.
Howard Archer, chief UK economist at IHS Global Insight, said: “Despite overall signs that activity picked up in January after GDP contracted 0.2% in the fourth quarter of 2011, the economy is far from out of the economic woods and it continues to face major obstacles to developing sustainable, decent growth.”
Joanne Segars, the chief executive of the National Association of Pension Funds, highlights the damaging impact this will have the value of pensions and calls for help for pension funds from the Pensions Regulator.
Segars says: “For the companies that run final salary pensions, QE is a headache which pushes their pension funds further into the red. This means businesses have to put more money into their pension schemes, instead of spending it on jobs and investment. Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes.”
Spanish economy sparks recession fears
Spain has been added to Europe’s growing list of shrinking economies after a damaging final quarter of 2011 sparked fresh fears of a recession.
The nation’s GDP had been steadily rising since a sharp decline in 2009 and 2010, but has entered negative figures once again after hitting and remaining at zero in the penultimate quarter of 2011. The GDP shrunk by 0.3%, which doesn’t seem too drastic compared to a record drop of -1.6% in 2009, but comes as a blow after a relatively stable 2011.
Spain has the highest jobless rate in the EU, with almost one in four people out of work. 400,000 people lost their jobs between the third and final quarter of 2011, pushing total unemployment numbers up to 5.3 million.
The downbeat fourth-quarter economy figures come even before the impact of new austerity measures unveiled last month by new Spanish Prime Minister Mariano Rajoy. These include budget cuts (€8.9bn) and eclipsing a tax increase (€6.3bn) by over 2.5 Billion Euros.
RBS economist Nick Matthews said: “Some countries in the eurozone may just avoid a recession, but that may be more difficult for Spain.
Given the need for fiscal consolidation in the country and the pressure that puts on domestic demand, it’s going to be very difficult for Spain to avoid recession.”
The Bank of Spain predicts an overall contraction of 1.5% by the end of 2012, and the International Monetary Fund estimates that the country will stay in recession until the end of 2013.
£10bn budget giveaway rejected by Treasury
The Treasury look set to persevere with their tough austerity plan even though the Institute for Fiscal Studies (IFS) have argued that a £10bn budget giveaway would be possible.
At the time of the 2011 budget the IFS were on board with George Osborne’s deficit reduction plan, however, they have now suggested that rather than forcing the Bank of England to raise interest rates the Treasury could give the economy a £10bn boost as: “the case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago.”
IFS director, Paul Johnson suggested there is a need to repair the fiscal damage caused by the recession but if the chancellor announced tax cuts or increased spending worth £10bn on budget day he would not be critical. Johnson warned that if the fiscal easing was increased to £15bn or more it could unsettle the financial markets.
George Osborne believes that the Bank of England should be responsible for any short term economic boost and feels that the Treasury deficit reduction programme allows the Bank to keep the current interest rate of 0.5%, lower than it would otherwise be.
Labour are in agreement with the IFS and want George Osborne to take fast action to risk permanent damage to the economy by temporarily cutting V.A.T and National Insurance contributions for employers and adding additional infrastructure spending.
The IFS say lower than forecast spending would mean the chancellor would have to borrow £124bn this year, £3bn less than he estimated last November, meaning that by 2016/17 borrowing could be £9bn lower. The IFS added that If Osborne recycles the £3bn under-spending by Whitehall departments during 2011-12 into a higher infrastructure investment in 2012-13 it would: “represent a modest fiscal loosening that could be easily explained to the markets and therefore would be relatively risk-free.”
TSC angered by speed of regulatory reforms
Andrew Tyrie, Treasury Select Committee (TSC) chairman, has expressed further concerns that the Government is passing legislation too quickly for the new regulatory switch due to take place early next year.
The end of last week saw the publication of the Financial Services Bill, which will set up the Financial Conduct Authority (FCA) and new regulatory practices. The publication was released before the TSC had submitted their final report on the enquiry into the accountability of the FCA, even though the TSC’s reports are supposed to inform Treasury policy.
Areas which were to be reviewed before the publication of the bill were the methods which the FOS and FCA will use under the new system to handle complaints, the objectives and role of the FCA and their product intervention powers. Tyrie has stated: “The fact that the Government has not waited to take account of the committee’s report on FCA highlights concerns that we are legislating too fast. We have to take the time to get this legislation right.”
In November last year, Tyrie had written to Conservative MP and joint committee on draft financial services bill chairman, Peter Lilley, suggesting that both committees should co-operate and scrutinise the bill effectively before it is passed through Parliament. In turn he stressed that attention could be given to the finer details, which would minimise any risks and flaws in the new system.
Tyrie’s stance is that: “This is only the start of the legislative process. Parliament must be given the time to discuss these important issues in detail.”
Economic Sentiment Indicator Rises
After 10 months of decline the Economic Sentiment Indicator has risen in both the EU and the Eurozone.
January saw the Economic Sentiment Indicator (ESI) rise by 0.6 points in the Eurozone and 1.2 points in the EU driven mainly by Germany and Spain. Many Economists hope that this is an indication that the recession in the Eurozone is coming to an end.
Economist, Christoph Weil, warns that this is only an indication of the euro economy as a whole and that many countries, mainly France, Italy and the Netherlands, have seen a further deterioration in confidence during January.
The rise in the ESI is forecast to increase again in February by a further 0.9 points, again pointing towards an end to recession in the Eurozone. However, Howard Archer, chief European and UK economist for IHS Global Insight, is keen to advise caution as the sentiment is still at a low level after 10 months of deterioration and therefore the Eurozone still has far to go.
Archer states: “Weakened domestic economic activity, intensified fiscal tightening in many countries and still serious uncertainties and concerns over the eurozone sovereign debt crisis continue to limit the upside for sentiment,” Archer continues.
“Consumers’ purchasing intentions remain limited while businesses’ employment expectations remain well below the levels seen in the early months of 2011.”
Renewed surge in PPI complaints to FOS
It has emerged that the number of complaints referred to the Financial Ombudsman Service relating to payment protection insurance has increased by almost 60 per cent during the last quarter.
In a report published this week, the FOS received 30,301 PPI complaints between October and December – an increase of 57 per cent from the 19,259 PPI complaints in the three months prior to September.
Despite the number of PPI complaints having increased over the period, the proportion being upheld has dropped from 92 per cent to 68 per cent between June and September. The FOS is anticipating the arrival of 165,000 fresh PPI complaints throughout 2012/13, accounting for around 60 per cent of new cases.
Complaints relating to mortgages are down 14 per cent over the last three months, from 2,796 to 2,383. During the same period 24 per cent were upheld, whereas personal pension complaints have also decreased 11 per cent from 506 to 450, with 35 per cent upheld.
In contrast, complaints relating to unit-linked investment bonds plateaued at 194, with 59 per cent of complaints upheld.
The FOS is subsidised by a blend of case fees and an industry levy. It is understood that the ombudsman is considering introducing an additional case fee of £350 from April, on top of the current case fee of £500, for each PPI complaint received from institutions that have more than 25 PPI complaints referred to the FOS annually.
FOS chief executive Natalie Ceeney says: “The challenges of our PPI workload are unprecedented. Initial feedback from stakeholders suggests that most believe we will continue to receive substantial volumes of PPI complaints for another two to three years. This seems a sensible basis on which to plan, given the size of the PPI market, the number of PPI complaints made direct to banks and other financial businesses last year alone, and the potential extent of detriment to consumers.”
Additionally, the FOS are planning to increase the ‘free-case’ allowance small firms have each year before having to pay the £500 case fee from three to 25 a year. If agreed this would come into effect in April 2013.
Mervyn King at odds with TSC
MPs’ calls for a new supervisory board to monitor the Bank of England (BoE) have been rejected by the BoE’s governor, Sir Mervyn King.
The Treasury Select Committee (TSC) has produced a report into the BoE’s accountability which called for a veto over the appointment of future Bank governors and for its court to be reformed. Speaking at a TSC hearing yesterday, King agreed that although some new accountability measures were needed in some areas there was no need for an overhaul of the BoE’s court, which functions as its board.
King has proposed that an oversight committee should be set up to periodically review decisions made by the Financial Policy Committee, but that this committee would sit beneath the Court. In written evidence, King and David Lees, the court chairman, said that the new oversight committee should in no way second guess policymakers.
The BoE’s submitted document suggests that the oversight committee should occasionally report on the BoE’s financial stability decisions and commission reports by external experts. The submitted evidence states: “This committee should assess whether the process employed in making financial policy decision have considered a full range of options and have taken reasonable account of the relevant information, analysis, differing views among policy makers and challenges from outside the bank.”
The TSC chair, Andrew Tyrie, has already indicated that the committee will challenge the BoE’s proposal for not going far enough and that the TSC will publish a response to the Bank’s proposal in time for the Chancellor to consider before he publishes the financial services bill, which will provide the new set up. Tyrie stated that “Whilst supporting some of our recommendations, on several key points the Court of the Bank falls short of what is needed.”
IMF may receive more funds from Britain
David Cameron has suggested that Britain may give billions more to the IMF to indirectly aid the deteriorating Eurozone financial crisis, after initially ruling out increasing Britain’s contribution above the £10bn already approved by MPs in July 2011.
Cameron’s concern that Britain may need to do more is likely to be in anticipation of the upcoming G20 finance ministers meeting next month. Both China and Japan have indicated that they may increase their donations to the IMF. Cameron has so far refused to increase Britain’s contribution to €30bn as part of a European contribution of €150bn. He has, however, left open the possibility of taking part in a global contribution. IMF experts have suggested that donations from foreign treasuries will depend upon the commitment of European nations to creating sustainable economic strategies for its troubled countries.
Although David Cameron’s spokesman has denied that any proposals to increase Britain’s contribution are currently on the table, he did suggest that it is predicted to be a major theme of the G20 meeting in February.
The Prime Minister’s major concern at home would be trying to convince Conservative Euro-sceptics that increasing Britain’s contribution would be in the nation’s best interest. Any increase would have to be approved by Parliament and Cameron struggled to keep support from his own party last July, when 30 Conservative MPs sided with Labour against the proposed contribution.
Euro-sceptics are increasingly finding sympathy amongst their American counterparts who believe, as voiced by Cathy McMorris, Republican Congresswoman: “There is no reason why countries such as America and Great Britain – which are facing their own fiscal crises – should have to bail out the Eurozone.”
ECB strive to prevent credit crunch
The European Central Bank (ECB) has offered cheap three-year loans in an attempt to prevent another credit crunch. It hoped to lend up to €450bn and has exceeded this by almost €30bn as over 500 banks have raced to borrow from the scheme, benefitting from interest rates as low as 1%.
Jonathan Loynes at Capital Economics has stated that “while this might help to address recent signs of renewed tensions in credit markets and support bank lending”, whether this money will be used to reduce sovereign debt is doubtful, as he believes banks will “use the funds to purchase large volumes of peripheral government bonds.”
While the scheme has been regarded as a positive step, some suggest the money will just be used to boost bank balance sheets, especially since the ECB lowered its collateral requirements when it announced the loans, enabling weaker banks to apply for the funds.
Carsten Brzeski at ING, said: “The good news is that banks won’t have to worry about liquidity for three years and that it has already pushed down government yields, as banks are buying them to use as collateral … whether the ECB’s hope that the money will filter through to the real economy will be fulfilled remains to be seen.”
The ECB’s move comes in the wake of turbulent times for the Eurozone. Banks in countries such as Greece and Ireland have lent large amounts of money to their national governments, and others in the Eurozone, by buying sovereign bonds. Yields have been rising during the past few months, reflecting a higher risk that a country may default.
The banks that are left holding large amounts of Eurozone sovereign debt are in turn seen as risky by money markets who force them to pay more to borrow money. This situation encourages banks to lend less themselves, which trickles down to consumers and small businesses, which find it harder to get loans. Banks taking the three-year loans at 1% are being encouraged to invest in sovereign debt at 6% to 7%, which not only provides a lucrative return for the banks, but increases demand for sovereign debt.
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