Team No Comments

Markets in a Minute – Stocks rebound as Fed calms rate hike fears

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday evening, which provides up to date analysis on rising global stock markets.

Global stock markets rose last week as the US Federal Reserve signalled that interest rate hikes are still a long way off despite the recent rise in inflation.

The Nasdaq surged 2.8% and the S&P 500 gained 1.5%, with full approval of the Pfizer vaccine helping to offset concerns about the attack at the Kabul airport in Afghanistan. A surge in crude oil prices boosted energy stocks.

In Europe, the STOXX 600 added 0.8% amid encouraging economic data and comments from the European Central Bank that high inflation should prove temporary. The UK’s FTSE 100 also rose, despite figures showing a marked slowdown in the services sector.

Over in Asia, Hong Kong’s Hang Seng recovered from the previous week’s rout to gain 2.3%. Japan’s Nikkei also performed strongly, adding 2.3% despite another extension to the country’s Covid-19 state of emergency.

US indices reach record highs

US stocks started this week in the green amid ongoing optimism that the Federal Reserve will not immediately taper its support for the economy. The S&P 500 and the Nasdaq hit new record highs on Monday (30 August), ending the day up 0.4% and 0.9%, respectively. August was the S&P 500’s seventh consecutive month of gains – its longest winning streak since a ten-month run ending in December 2017.

The FTSE 100 struggled for direction on Tuesday, slipping 0.4% during its first trading session following the bank holiday weekend. The pan-European STOXX 600 also slipped 0.5% after data showed consumer price inflation rose by 3.0% in August – the highest level since 2011.

The FTSE 100 was up 0.8% at the start of trading on Wednesday, ahead of the release of the closely watched US ADP jobs report.

Fed clarifies position on interest rates

Last week’s economic headlines were dominated by Fed chair Jerome Powell’s speech at the Jackson Hole symposium, in which he signalled that while the central bank could begin dialling back its support for the economy later this year, interest rate hikes are still a long way off.

The Fed has repeatedly stated that it will maintain its pace of asset purchases until it sees ‘substantial further progress’ towards its goals of 2% inflation and maximum employment. On Friday, Powell said the first of these thresholds has been met, and clear progress has been made on the second.

Powell reiterated his view that the recent rise in inflation will prove temporary, and insisted that any tapering of economic support would not be a direct signal to increase interest rates. (Higher interest rates are a headwind for stocks because bond yields rise, making stocks look less attractive in comparison.)

UK business output growth slows

Here in the UK, figures suggested growth in the manufacturing and services industries slowed in August amid staff shortages and supply chain constraints. IHS Markit’s preliminary composite purchasing managers’ index (PMI) measured 55.3 in August, down from 59.2 in July. The reading was still above the 50.0 mark that separates growth from contraction, but marked the slowest expansion of output since the UK private sector returned to growth in March.

The services sector suffered the biggest loss of momentum, falling to 55.5 in August from 59.6 in July. Manufacturing output slipped to 54.1 from 57.1 the previous month.

Chris Williamson, chief business economist at IHS Markit, said: “Although the PMI indicates that the economy continues to expand at a pace slightly above the pre[1]pandemic average, there are clear signs of the recovery losing momentum in the third quarter after a buoyant second quarter. Despite Covid-19 containment measures easing to the lowest since the pandemic began, rising virus case numbers are deterring many forms of spending, notably by consumers, and have hit growth via worsening staff and supply shortages.”

Eurozone economy keeps expanding

In contrast, business activity in the eurozone continued to grow in August at one of the strongest rates of the past two decades. Despite supply chain delays, the IHS Markit flash eurozone composite PMI held close to its 15-year high, slipping slightly from 60.2 in July to 59.5 in August.

Growth in the services sector overtook that of manufacturing for the first time since before the pandemic, as lockdown restrictions continued to ease. At 59.7, service sector growth was only marginally lower than July’s 15-year high. Manufacturing output also remained strong at 59.2, down slightly from 61.1 in July.

The report showed inflation in input costs and selling prices remained elevated, although the European Central Bank’s chief economist, Philip Lane, sought to allay fears by telling Reuters that recent inflationary pressures are likely to prove temporary.

China to cooperate on US auditing

Elsewhere, China’s securities regulator said it will ‘create conditions’ to cooperate with the US over how it supervises the auditing of Chinese companies, potentially signalling the end of a long-running dispute between the two countries. Previously, China refused to let US securities regulators inspect the financial audits of its US[1]listed companies on the grounds they could hold state secrets. Earlier this year, Chinese firms were warned they could be delisted if they refused to comply with the US audit rules, raising concerns the two countries’ financial systems could become decoupled.

According to the South China Morning Post, the China Securities Regulatory Commission hasn’t yet released details on how audits will be made more transparent.

Please check in again with us soon for further relevant content and market news.

Stay safe.

Chloe

02/09/2021

Team No Comments

A unique event on Prudential’s ‘smoothed’ funds – a Unit Price Reset

Please see below details relating to the unique event impacting Prudential’s ‘smoothed’ funds.

The Pru PruFund ‘smoothed’ range of funds have been in existence since 2004 in an investment product.  Late yesterday afternoon, for the first time in c 17 years, Prudential announced a Unit Price Reset (UPR).  This is an increase in fund value in this case.

It looks similar to a Unit Price Adjustment (UPA) and is also a part of the ‘smoothing’ mechanism for PruFund funds.  If you look in their guide to the smoothing process, you can see it mentioned on the bottom of page 3;

https://www.pruadviser.co.uk/pdf/PRUF1098101.pdf?utm_term=PruFund%20Quarterly%20EGR%20&utm_campaign=PruFund%20&utm_content=email&utm_source=Act-On+Software&utm_medium=email&cm_mmc=Act-On%20Software-_-email-_-Latest%20EGRs%20and%20UPRs%20for%20the%20PruFund%20range%20of%20funds-_-guide%20to%20the%20smoothing%20process

Why is this happening now?

We have been through an unprecedented time in 2020 with the sharpest and quickest falls in markets and then subsequent recoveries.  The underlying fund performance has been strong since March 2020 and this UFR ensures that this is fully delivered to you.  To quote the Pru ‘It’s being done because it’s the right thing to do for all policyholders.’

It’s about treating customers fairly, in this case for clients like you in the Pru’s ‘smoothed’ funds.  Unusual circumstances can require unfamiliar solutions – all subject to a rigorous framework and governance and overseen by a specialist actuary, a specialist committee and signed off by the Prudential Assurance Company board.

How does impact on me?  The following UPRs have been announced:

ProductFundUnit Price Reset
Flexible Retirement PlanPruFund Growth+5.66%
Flexible Retirement PlanPruFund Risk Managed 4+4.56%
Trustee Investment PlanPruFund Growth+5.66%
Prudential ISAPruFund Growth+5.66%
Retirement AccountPruFund Growth Series D+5.66%
Retirement AccountPruFund Risk Managed 4 Series D+4.56%
Retirement AccountPruFund Growth Series E+3.63%
Retirement AccountPruFund Risk Managed 4 Series E+3.69%
Retirement AccountPruFund Risk Managed 5 Series E+5.02%

The difference in the UPRs is based on the current position, for example, if UPAs have been applied more frequently, as is the case with Series E funds.  It is also based on your risk profile, different funds such as the Risk Managed 4 and 5 funds have a different risk profile.

The only funds that have not been affected by this UPR is the brand-new range of smoothed funds, the five funds that are PruFund Planet.  I’ve outlined the main funds in the table above that affect our clients. It’s nice to get some good news at the moment, hopefully this will add to your enjoyment of the Bank Holiday weekend!

Steve Speed

26/08/2021

Team No Comments

Inching closer to the exit

Please see below article received from Legal & General yesterday afternoon, which reviews the markets’ reaction to the disorderly withdrawal of US and UK troops in Afghanistan and the ongoing global battle with coronavirus.

Last week, we received the minutes of the Federal Open Market Committee (FOMC) meeting held at the end of July. Tapering was the word of the day. A reduction in the pace of asset purchases is now overwhelmingly expected by the year’s end. When thinking about the risks to global markets posed by tapering, we believe it is worth remembering three things.

Minutes minutiae

First, never has a pending policy change been discussed so much, by so many, for so few insights. Market shocks tend not to be driven by things that are almost entirely predictable.

Second, aggressive tapering happened last year, and nobody really noticed. In the first three months of the COVID-19 crisis, from March to May 2020, the Federal Reserve (Fed) bought $1.6 trillion of Treasuries. In the subsequent 14 months, it has bought just over $1.1 trillion. The pace of asset purchases has slowed down by 85% since those early days. Since then, the S&P 500 is up over 50%, credit spreads are tighter, and real yields are lower. Anyone arguing that asset-purchase flows are the “only game in town” has a tough time explaining that.

Third, the 2013 taper tantrum was a stressful time for emerging-market investors, but a non-event for investors in US equities. The S&P 500 had a peak-to-trough drawdown of 5.5% in the middle of 2013. That’s it.

So, what could a genuine tapering surprise look like? The potential action is not in the timing but in the pace. Last time around, tapering took 10 months; formally announced in December 2013, it ran until October 2014. It was then another 14 months from the end of tapering to the first rate hike, so it was a two-year process before we reached the serious business of rate hikes.

We think the timelines can be compressed this time around, but still struggle to see the conditions for a rate hike before mid-2023. Even the most hawkish voices on the FOMC are talking about end-2022 as the likely “lift-off” date.

That means that the real yield on cash (almost certainly) and on government bonds (probably) will remain deeply negative for the foreseeable future. There is plenty of discussion about overvalued equity markets, but the forward earnings yield on the MSCI World is still in the region of 5%. That looks mighty tempting in a world with $16 trillion of negative-yielding debt.

Regime change in Afghanistan

The world has witnessed incredibly dramatic scenes in Afghanistan. But what pointers are markets taking from the collapse of the Western-backed government?

The Afghani currency has tumbled by nearly 10%, but it is too exotic for even the most high-octane frontier market funds. It is impossible to know how the unfolding tragedy will evolve, but the markets are adept at drawing dotted lines from one political theatre to others. We can think of three implications:

  • It raises immediate concerns about the pending withdrawal of US troops from Iraq. The combat mission there is due to end by December, with the remaining 2,500 US troops leaving. Given that Iraq produces the best part of four million barrels of oil per day, political instability there has a firmer transmission route to global risk sentiment than Afghanistan.
  • The effectiveness of the US deterrent in other parts of the world has arguably been undermined by the rapid withdrawal of support in Kabul. In particular, China’s state media have immediately drawn the link from Kabul to Taipei. The Global Times has been quick to play up the “unreliability of US commitment to its allies”, arguing that in the event of war “the island’s defence will collapse in hours and the US military won’t come to help”. This is not exactly subtle messaging, but it does force markets to think harder about the superpower tensions.
  • During the 2014-15 migrant crisis, the European Union received 1.6 million requests for asylum. We think of that migration wave being a consequence of the Syrian civil war, but roughly one-sixth of asylum seekers were from Afghanistan and Pakistan. Three years ago, we wrote about the potential for uncontrolled refugee flows to act as a catalyst for higher political risk premia across Eastern and Southern Europe. Asylum policy is set to become a divisive political issue once again, with worrying implications for French and Italian politics. “Le spread” and “lo spread” will be the centre of the market’s attention before long if refugee flows are not well managed.

Kiwi fails to take flight

New Zealanders are pioneers in many things: kiwifruit, rugby, manuka honey. But they are also world leaders in central-bank innovation. The Reserve Bank of New Zealand Act came into effect in 1990, and it wasn’t long before the innovation of “inflation targeting” spread all the way around the world.

Since the pandemic, its innovation has taken two forms: formally adding a housing concern to its policy mandate, and acting as the frontrunner in the move to normalisation. At the beginning of last week, the market assumed the first increase in rates since 2014 was a foregone conclusion. That confidence was derailed by COVID-19.

Since February last year, New Zealand has reported just under 3,000 COVID-19 cases with fewer than 30 deaths. The “zero COVID” strategy has been immensely successful but requires an aggressive response to even the smallest incidence of community transmission. Re-imposing a lockdown across the country triggered a 2.5% swoon in the New Zealand dollar and saw expectations of rate hikes pushed back to later in the year.

The risks here are evident across the Tasman Sea, where COVID-19 cases in New South Wales continue to double every 10 days despite a lockdown now entering its 10th week. Sydney is in a trap with no obvious escape route. The markets have to price the risk that Auckland will soon be stuck in the same bind.

This is a reminder that currencies remain pretty sensitive to developments in interest rates. Interest-rate differentials have not been a factor for several years because G10 interest rates haven’t been moving. That could change in 2022, with some early movers starting to normalise.

The skew of risks around the interest-rate path outlined by central bankers also remains to the downside. Despite lots of rhetoric about inflation concerns, last-minute worries about growth can still kibosh hiking plans.

Finally, zero-COVID strategies require constant vigilance. There’s an obvious read across here to China. The news there over the past week has looked better, with case numbers declining again, but trying to keep a highly infectious disease out of the country altogether will be an ongoing battle with economic collateral damage. Our China outlook for the rest of the year is notably more downbeat than the consensus as a result.

We will continue to publish relevant content and news as we enter the final couple of weeks of summer in the UK.

Stay safe.

Chloe

24/08/2021

  

Team No Comments

Weekly Market Update

Please see below “Investment implications of recent Chinese policy interventions” received from JP Morgan this morning, which provides details relating to recent changes made by Chinese regulators.

Having outperformed other regional stock markets for much of the pandemic, Chinese stocks have fallen sharply over the past few months (Exhibit 1). Concerns around the Chinese economy slowing were blamed for the initial move, but more recent declines have been triggered by regulatory tightening focused in specific sectors. This piece sets out why we remain positive on the medium-term outlook for Chinese assets, although we recognise that it may take some time for the scope of regulatory tightening to become clearer before sentiment towards the stock market improves.

Exhibit 1: Chinese and developed market equity returns

Source: MDCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past Performance is not reliable indicator of current and future results. Data as of 16 August 2021. 

How should investors interpret the latest regulatory changes? 

Recent moves from policymakers are best understood in the context of Beijing’s efforts to balance short-term growth against longer-run policy objectives. 

In the technology sector, Chinese regulators are taking steps to address inappropriate use of market power, limit regulatory arbitrage opportunities and increase market competition. Cybersecurity is another emerging focus, with companies’ treatment of user data receiving particular attention. There are clear parallels to regulatory actions witnessed in developed markets in recent years. Companies that have chosen to pursue overseas listings – often Chinese technology names trading on US exchanges – are also coming under additional scrutiny and may be particularly vulnerable to future rulings. While broadly we are seeing technology regulators take a more active stance, we do not believe it is in China’s strategic interests to punish its domestic champions, particularly in the context of the longstanding US-China rivalry. Instead we think regulators want to ensure that technology giants are competing with the next cohort of innovators in a fair and well-functioning market.

The education sector has also seen significant regulatory changes. The Chinese government will no longer approve the setup of new private tutoring companies, and existing companies which tutor the school curriculum will be required to transform into non-profit institutions. While private sector tuition remains discretionary in most western countries, after-school tutoring has become so pervasive in China that authorities now view it as a key social policy challenge. The latest measures are designed to alleviate both the mental burden of extra tuition on students and the financial burden for parents, with a view to stemming the decline in China’s birth rate over time. In this context, we do not expect that the severe actions taken in the education sector will become widespread across the private sector. 

The tone of recent policy interventions has highlighted that Beijing is keen to ensure that corporate behaviour remains aligned with the administration’s long-term policy goals. That said, we do not believe this represents a fundamental shift in another key long-term objective: to open up Chinese markets to foreign capital. Substantial efforts to integrate both Chinese equities and bonds into international indices are ongoing. In our view, policymakers will be acutely aware that they do not want regulatory actions to undermine the attractiveness of Chinese assets to the global investment community. 

What do we expect next? 

The Politburo meeting at the start of August provided greater insight into the economic and regulatory policy direction for the rest of the year. 

Further reforms are still on the cards for some of the ‘new economy’ sectors where the Chinese authorities wish to achieve better social outcomes or improve the competitive environment. Regulatory uncertainty will remain elevated until the scope of reforms becomes clearer, particularly for politically or socially sensitive industries. It is important to recognise, however, that many of China’s new economy leaders will still have room to chart future growth; they have been working closely with the government for many years and will continue to do so. 

There will also be sectors that benefit from future policy changes. Examples include climate-focused technology to support greenhouse gas reductions, industries related to accelerating the rollout of electric vehicles, and sectors critical to achieving self-sufficiency within key parts of the technology supply chain. 

From an economic perspective, the Chinese government recognises the imbalances in the economic recovery, with small and medium-sized enterprises and low-income households having lagged to date. As a result, targeted fiscal stimulus is likely to be preferred to monetary policy in supporting growth for the rest of the year. Monetary policy has shifted to a more neutral stance following modest tightening in the first half of the year, although further easing is possible if growth momentum continues to fade. Broadly, Beijing appears to be fine-tuning growth back on to a more stable path, having gone through the “boom phase” of its recovery last year.

The impact of the spread of the Delta variant remains something of a wildcard. The Chinese government was highly effective at stemming the spread of previous variants, but cases have been on the rise again. Vaccine rollout is proceeding at pace, although real-world studies of the efficacy of different vaccines remain limited. This will be an issue to watch closely over the coming months. We don’t expect a repeat of the sharp slowdown witnessed in the Chinese economy last year, but given China’s desire to pursue a “zero-Covid” strategy, there is a risk that restrictions will be applied periodically. This could well have knock-on impacts in the global supply chain; recent shutdowns linked to Covid-19 in Ningbo-Zhoushan – the world’s third busiest port – are a prime example.

What are the investment implications?  The sharp declines over the past few months have served as a reminder that Chinese equities do come with a higher level of volatility than many other markets. Over the past 25 years, the annualised return from the Chinese stock market is over 5% in local currency terms, despite average intra-year declines of close to 30%. Calling the bottom of any market correction is an impossible task, although valuations have now fallen substantially, from over 18x 12-month forward earnings at the peak earlier in the year to below 14x today for MSCI China. While valuations may remain under pressure until the markings of the regulatory playing field become clearer, ultimately, we expect investor attention to gradually return to company-specific fundamentals. 

In our view, Chinese assets remain an essential part of both global equity and global bond allocations. Beijing has made a huge push to open its capital markets to international investors, and we expect this to remain a priority. Short-term volatility has not fundamentally changed the long-term investment opportunity in China, which is based on technological innovation and the rise of the domestic consumer. The key for investors is to access the Chinese markets in the right way: via a diversified portfolio of both onshore and offshore companies and with an active approach that can differentiate between the winners and losers of the government’s long-term policy goals. 

Please check in with us soon for further relevant content and market news.

David

23rd August 2021

 

Team No Comments

New ‘Smoothed’ funds from Prudential with an ESG focus – PruFund Planet

Prudential have recently launched 5 new funds with an ESG (Environmental, Social and (corporate) Governance) focus, the PruFund Planet range of funds.  This is good news and indicates the general direction of travel for fund managers. We see existing funds moving in this direction as well as a constant stream of new funds being launched with an ESG label on them.

PruFund Planet’s fund range is different in that it has the unique ‘smoothing’ element and is managed by M & G’s Treasury & Investment Office, the same team that manage the existing PruFund range of funds that launched originally in 2004.  They have a good long term track record.

Prudential are gradually integrating an ESG focus into the old PruFund range of funds through engagement with the existing underlying businesses and funds they are invested in.  There are c 5,000 different investments in PruFund Growth.

PruFund Planet is being launched with £500 million in seed capital, £100 million per fund.  For standard funds (not multi asset smoothed) this might be a reasonable amount of money for a new fund to get started.  I’m not sure that this is enough for a ‘smoothed’ fund when compared to the scale of PruFund Growth.

The problem (or the good news!) is that PruFund Growth is exceptional in terms of scale, leverage and buying power in markets.  The investment fund can write big cheques for large infrastructure projects, private equity and private credit.  This differentiates the fund, and allows it to invest in assets that will provide a good return, in turn helping to hold up the Expected Growth Rate (EGR).

Pricing of PruFund Planet funds at 0.65% fund management charge is the same as the existing ‘smoothed’ funds.  This is competitive for this multi asset fund.  The Expected Growth Rates of PruFund Planet funds are in line with their existing (original) smoothed fund peers initially.  I can see divergence of these in the future.

Summary

We are still conducting our due diligence and undertaking additional research on these funds.  Ideally, I would like the comparable fund to perform similarly to PruFund Growth.  This would offer the best risk/reward potential.

For now, I think it would be very risky to wholly invest in one of the PruFund Planet funds.  Once we complete our research and due diligence, it might be appropriate to invest a small proportion of your invested assets into PruFund Planet funds.

It’s a nice option to have for the future, particularly for those of us with an ESG focus.

Steve Speed

17/08/2021

Team No Comments

Could the state pension age hike be reversed?

Please see below article received from AJ Bell yesterday afternoon, which hints that chances of a u-turn on when you can take your entitlement look slim. At the end of the commentary, you will also find our view on the matter.

Today men and women in the UK have the same state pension age of 66. This has not always been the case, however.

Prior to 2010, women received their state pension from age 60, while men had to wait until age 65. The 1995 Pensions Act first put forward proposals to increase the women’s state pension age to 65 – bringing it into line with men – between 2010 and 2020.

The 2011 Pensions Act accelerated this timetable, meaning state pension ages were equalised at age 65 in 2018 before increasing to age 66 by 2020.

From here, plans are in place to increase the state pension age to 67 by 2028 and 68 by 2046 (although the Government has previously indicated this could be brought forward to 2039).

Campaigners have long argued the changes introduced under the 1995 and 2011 Pensions Acts were unfair to women born in the 1950s, with some forced to wait six years longer than expected to receive their state pension.

One of the central charges was that the Department for Work and Pensions (DWP) failed to adequately notify affected women so they could adjust their retirement plans.

This case was considered recently by the Parliamentary and Health Service Ombudsman (PHSO), which investigated complaints that since 1995 the DWP had failed to provide ‘accurate, adequate and timely information about changes to the state pension age for women’.

The Ombudsman concluded that the DWP did not adequately respond to research in 2004 which recommended information should be ’appropriately targeted‘ at those affected by the reforms. As a result, it found maladministration had occurred.

While the Ombudsman’s finding may feel like vindication to the so-called ‘WASPI’ (Women Against State Pension Increases) campaigners, it has no power to compel the Government to provide compensation or redress.

In 2019 the High Court heard arguments that the state pension age increase discriminated on the ground of age and/or sex and sought a judicial review of the Government’s ‘alleged failure to inform them of the changes’.

The Court dismissed the claim on all three counts, and an appeal to the Court of Appeal in 2020 was also thrown out.

The Government has previously said putting men’s and women’s state pension ages back to 60 could cost £215 billion. Given the impact coronavirus has had on the UK’s finances, it seems extremely unlikely the Government will cough up this amount of money – or anything at all for that matter – if it is not compelled to.

P and B Comment

From my point of view, I don’t think there is any chance of State Pension age being lowered. It makes great economic sense for the State to keep putting State Pension age back, age 68 or even age 70 at some point.  A later State Pension age saves money for the State by not paying it out as early and probably keeping the majority of people in work, therefore generating higher income tax receipts.

In context, when real State Pensions commenced in a similar format to todays a few years after the end of World War II, the average man would have retired at age 65 and would have died about 2 years later.  Now, we could be looking at an average of 15 years of inflation linked income with potentially another 10, 15 or 20 years for those with good longevity.

The cost to the State is enormous and as we live longer, it will increase.  The ageing demographic – you can also add to the healthcare cost too.

One of the key messages I believe is to educate people about the State Pension and other pensions such as Workplace Pension provision.  If the young working population join pensions early, and fund them at a good level, they won’t be as reliant on the State Pension.  This could really make a difference to your lifestyle in retirement.

Steve Speed DipPFS

13/08/2021

Team No Comments

How mooted pension tax relief reform plans could hit savers

Please see below article recently received from AJ Bell, which warns of the potential impact that tax relief reform could have on pensions and investors.

Recent press reports suggest the Treasury is eyeing cuts to pension tax incentives to help pay the cost of COVID. Reforms said to be under consideration include introducing a flat rate of pension tax relief, cutting the lifetime allowance or taxing employer contributions.

Beyond the political fire and brimstone a pensions tax raid would cause among Conservative backbenchers and voters, there would be significant practical implications for any of the proposals floated by the Treasury.

Cutting tax relief for individuals risks undoing the groundwork laid by automatic enrolment and sowing mistrust in the stability of the retirement savings framework.

Hitting employers, meanwhile, might raise a fast buck for the Chancellor but would risk strangling off the UK’s pandemic recovery.

There were always going to be tough fiscal choices as the country slowly shifts away from dealing with the health emergency of Coronavirus and focuses on the financial hole blown in the Exchequer’s balance sheet.

It is critical any proposals for pension tax reform consider both short and long-term priorities, and in particular the challenge of ensuring current and future generations’ retirement prospects are not fatally damaged.

Introducing a flat rate of pension tax relief

Given the priority of the Government is to raise cash for the post-COVID economic recovery, a flat rate of pension tax relief would likely need to be set well below 30% to achieve this.

In fact, analysis carried out by the respected Pensions Policy Institute* suggested setting a flat rate of pension tax relief at 30% would actually cost the Government money, while a rate of 25% might save between £2-£3billion a year and 20% around £6-£8 billion a year.

Such huge savings would clearly come at a cost to individuals. For example, if a flat rate of 20% was introduced, a 35-year-old earning £60,000 and paying 4% of salary into a pension could miss out on £50,000 of retirement income by the time they are 67. Those earning more or making larger contributions would face an even bigger hit to their plans.

However, the big challenge in going down this road – both practically and politically – lies in the public sector, where some workers continue to enjoy generous guaranteed defined benefit pensions.

In order to apply a flat rate of relief to these pensions a tax charge would need to be calculated and applied directly to employees by HMRC.

Doctors and senior NHS staff who have been on the front line dealing with the pandemic would likely end up with tax bills running into thousands of pounds as a result.

Reduce the pensions lifetime allowance from £1,073,100 to £900,000 or £800,000

The lifetime allowance has been tinkered with relentlessly by successive Governments, reducing from £1.8 million a decade ago to just £1 million by 2016/17. Two years later it was pegged to CPI inflation – but this link was removed for the rest of this Parliament by Rishi Sunak in March. This constant tinkering has led to huge complexity and uncertainty for retirement savers.

If we were to get yet another cut to the lifetime allowance to £900,000 or even £800,000, as has been suggested, more diligent savers would be at risk of breaching the limit.

To put this in context, reducing the lifetime allowance to £800,000 would mean after tax-free cash has been taken the retirement income someone could take at age 66 would be well below the average salary in the UK.**

This would feel like an extremely low bar to set for people’s retirement aspirations.

Tax employer pension contributions

Of the pension tax proposals floated this was the one with the least amount of detail attached – which is saying something.

At the moment employer pension contributions are exempt from National Insurance, so it is theoretically possible the Treasury could reverse this position – or perhaps apply a limited charge – in a bid to raise revenue.

However, going down this road would cause uproar among businesses already struggling to deal with the fallout from the pandemic. It could also be counterproductive if landing these firms with extra costs forced them to hold off on investment.

Over the long-term, any increase in the costs of providing pensions would likely see a damaging levelling down of provision.

Comment

Pension tax reliefs have been under review since Gordon Brown was the Chancellor in 1997, remember his tax raid?  Every government looks at them.

Whilst changing tax reliefs could save money for the State, we need to look at the bigger picture.  What would be the impact on pension savings?  If people save less in pensions, they will rely more on the State.  This is not what any government wants.

I think tinkering with employer pension contributions tax relief would be particularly damaging.  Employers need to help fund employee’s pensions.

Hopefully, we won’t see any change in this area, but we also know that we need money now too to support the country in key areas, covid debt interest payments (long term repayment?), to re-build the NHS/Social Services/Residential Care etc., and to help kick start the economy in the UK.

The other issue is timing, Rishi Sunak needs all of us to go out and spend money now to help the economy recover.  He can’t scare us into not spending, we will fall back into recession.

Steve Speed

02/07/2021

Team No Comments

Pensions and Divorce Blog

Please see below an article on Divorce Law reforms from FT Adviser, which caught my eye as this is an area of advice we get involved in and I think helps highlight just how long it can this process can take:

Couples seeking a no fault divorce under new legislation will now have to wait until 2022, the government has confirmed.

The implementation of the Divorce, Dissolution and Separation Act will now come into force on April 6, 2022, not in October as the government had originally planned.

In a written answer to a question posed by Conservative MP Jane Stevenson, published yesterday (June 7), Chris Philp, parliamentary under secretary of state at the Ministry of Justice, said the original implementation date had been “ambitious”, although the bill received Royal Assent in June 2020.

He said the government had started work to identify, design and build the necessary amendments to court forms and also to amend the online digital divorce service while rules are being finalised.

But he admitted these amendments will not be finished before the end of the year.

Philp said: “The Ministry of Justice is committed to ensuring that the amended digital service allows for a smooth transition from the existing service which has reformed the way divorce is administered in the courts and improved the service received by divorcing couples at a traumatic point in their lives. 

“Following detailed design work, it is now clear that these amendments, along with the full and rigorous testing of the new system ahead of implementation, will not conclude before the end of the year.

“While this delay is unfortunate it is essential that we take the time to get this right.”

The no-fault law will require divorcing couples to provide a statement of irretrievable breakdown and replace the need for evidence of conduct, such as adultery or unreasonable behaviour, or proof of separation. 

According to the government, the act provides for the biggest reform of divorce law in 50 years and will reduce conflict between couples legally ending a marriage or civil partnership as they will no longer have to blame each other for the breakdown.

A Ministry of Justice spokesperson said: “Our changes will help divorcing couples to resolve their issues amicably by ending the needless ‘blame game’ that can exacerbate conflict and damage a child’s upbringing.

“These measures represent the biggest reform to divorce laws in 50 years, so it is right that we take time to ensure they are implemented as smoothly as possible.”

Alongside the no fault rules, the Divorce, Dissolution and Separation Act will remove the possibility of contesting the decision to divorce, as a statement will be conclusive evidence that the marriage has irretrievably broken down.

It also introduces a minimum period of 20 weeks from the start of proceedings to confirmation to the court that a conditional order of divorce may be made.

Kate Daly, co founder of divorce service Amicable, said: “We’re disappointed to hear the no fault divorce bill is due to be delayed until 2022. It’s the biggest reform to UK divorce law in 50 years, so we cannot afford to rush it, but we see first-hand the emotional toll that divorce proceedings can cause when conducted in an acrimonious, fault-finding manner.”

She added: “At Amicable, we have helped thousands of people untie the knot harmoniously, and many of people we have spoken to are holding off until the new laws come into place. Waiting longer could prove incredibly challenging emotionally, and has additional implications such as not being able to finalise financial arrangements. 

“The Ministry of Justice should solve these technical issues as a priority to help people reach productive agreements.”

This latest deferral frustrates those awaiting amendments to what is already a lengthy and emotional process. This deferral doesn’t help reaching a financial settlement, including what assets, such as Pensions, that need to be included and what split is appropriate.

This is a complicated subject matter and something I will be writing about in greater detail via additional blogs over the coming weeks to show where we can add value and how we can help once the divorce is finalised.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

Independent Financial Adviser

09/06/2021

Team No Comments

PruFund range of funds – EGR and UPA announcement

Please see below for Prudential’s latest announcement regarding Unit Price Adjustments for the PruFund range of funds, received by us late yesterday 25/05/2021:

At this quarter’s review, we’ve announced no change to the Expected Growth Rates (EGR) and upward Unit Price Adjustments (UPA) to a number of the PruFund range of funds this quarter end.

PruFund UPA announcement 

Today we’ve announced there’s upward UPAs to the following PruFund funds:

FundUPA applied 
Prudential Investment Plan  
PruFund Growth Fund +3.56%
PruFund Risk Managed 4 Fund +5.33%
PruFund Risk Managed 5 Fund 
+3.67%
Trustee Investment Plan 
PruFund Cautious Pension/ISA Fund +2.00%
PruFund Growth Pension/ISA Fund+3.91%
PruFund Risk Managed 2 Pension/ISA Fund +2.09%
 PruFund Risk Managed 3 Pension/ISA Fund +3.22%
 PruFund Risk Managed 4 Pension/ISA Fund  +2.67%
Prudential ISA 
PruFund Cautious Pension/ISA Fund +2.00%
PruFund Growth Pension/ISA Fund +3.91%
PruFund Risk Managed 2 Pension/ISA Fund +2.09%
PruFund Risk Managed 3 Pension/ISA Fund +3.22%
 PruFund Risk Managed 4 Pension/ISA Fund  +2.67%
PruFund Risk Managed 5 Pension/ISA Fund +3.45%
Prudential Retirement Account – Series D 
PruFund Cautious Pension Fund – Series D+2.00%
 PruFund Growth Pension Fund – Series D+3.91%
PruFund Risk Managed 2 Pension Fund – Series D+2.09%
 PruFund Risk Managed 3 Pension Fund – Series D  +3.22%
PruFund Risk Managed 4 Pension Fund – Series D   +2.67%
Flexible Retirement Plan 
PruFund Cautious Pension/ISA Fund+2.00%
PruFund Growth Pension/ISA Fund +3.91%
PruFund Risk Managed 2 Pension/ISA Fund +2.09%
PruFund Risk Managed 3 Pension/ISA Fund +3.22%
PruFund Risk Managed 4 Pension/ISA Fund +2.67%
International Prudence Bond / Prudential International Investment Bond 
PruFund Cautious (Sterling) Fund +2.00%
PruFund Growth (Sterling) Fund+2.88%
PruFund Growth (Dollar) Fund+2.95%
PruFund Growth (Euro) Fund+2.68%

Please note UPAs also apply to the protected versions of the fund where applicable.

On the monthly PruFund Investment Date, a UPA is applied if the unsmoothed price is:

  • 4%, or more, higher than the smoothed price, for our PruFund Cautious, PruFund Risk Managed 1 or PruFund Risk Managed 2 funds, or
  • 5%, or more, higher than the smoothed price for our PruFund Growth, PruFund Risk Managed 3, PruFund Risk Managed 4 or PruFund Risk Managed 5 funds.

Growth rates aren’t guaranteed. The value of an investment can go down as well as up. Your client may get back less than they have paid in.

More information on the EGRs and UPAs for each product is available on PruAdviser.

Prudential have said that they have had a strong 6 month performance since the 25th November last year.  It’s important to note that PruFund funds lag both a rising and a falling market.  The increases or reductions in PruFund via UPAs are formulaic and non-discretionary.  They are based on the maths and the difference in fund value between the underlying assets and the ‘smoothed’ price.

M & G’s Treasury & Investment Office (TIO) who manage PruFund for Prudential are in the middle of a Strategic Asset Allocation review.  Within the next month or two we will find out how they change their assets focusing on long term returns.

The Expected Growth Rates (EGRs) have remained the same.  For example on PruFund Growth 5.70% gross per annum.  EGRs give you an indication of what the TIO think long term returns will be over 15 years plus.

These upwards Unit Price Adjustments are some very positive news and demonstrate the recovery in the markets as a whole. These UPAs combined with previous UPAs over the past 12 months have brought the majority of the PruFund range of funds back to positions similar to those before the drops caused by the Coronavirus Pandemic.

Hopefully this trend of recovery and positive performance continues as we see mass vaccine rollouts worldwide and lockdown restrictions gradually eased. Although we may not be out of the woods yet and there are no guarantees, this increase in the UPAs is a reason for optimism.  

Take care.

Paul Green DipFA

26/05/2021

Team No Comments

Everything you need to know about the state pension

Please see below for one of AJ Bell’s latest articles, received by us yesterday 13/05/2021:

WHAT IS THE UK STATE PENSION AGE?

The current UK state pension age is 66 for both men and women. It used to be the case that women received the state pension at age 60 and men at 65, but this was viewed as discriminatory and so successive Governments legislated to equalise the state pension ages of the sexes.

This happened in 2018, at which point the state pension age for men and women was slowly increased to 66 by 2020.

The state pension age is scheduled to rise again to 67 between 2026 and 2028. As with the increase to age 66, there will be a two-year transition where some people will have a state pension age somewhere between 66 and 67.

After 2028 the next intended increase in the state pension age is to 68 between 2044 and 2046. However, the Government has stated it wants to accelerate this move so it happens seven years earlier, between 2037 and 2039.

I RETIRED BEFORE 6 APRIL 2016 – HOW MUCH STATE PENSION WILL I RECEIVE?

For those who reached state pension age before 6 April 2016, there were two primary components: the basic state pension and additional state pension. This additional element consisted of:

  • Graduated Retirement Benefit built up between 6 April 1961 and 5 April 1975;
  • State Earnings Related Pension Scheme built up between 6 April 1978 and 5 April 2002;
  • State Second Pension built up between 6 April 2002 and 5 April 2016.

The full basic state pension is worth £137.60 a week in 2021/22 and rises each year in line with the highest of average earnings, inflation or 2.5% (the ‘triple-lock’). You needed at least 30 years’ National Insurance contributions to qualify for the full amount – for those with less than this, a deduction would have been made.

The triple-lock does not apply to any additional state pension entitlements you have, which instead increase each year in line with CPI (consumer prices index) inflation.

I RETIRED ON OR AFTER 6 APRIL 2016 – HOW MUCH STATE PENSION WILL I RECEIVE?

The Government decided the state pension system was too complicated and so, for those who reached state pension age on or after 6 April 2016, a reformed system was introduced.

Rather than having two tiers of state pension – the basic and additional state pension – people now build up entitlements to a flat-rate amount. In 2021/22 the full flat-rate state pension is worth £179.60 a week and also increases in line with the triple-lock.

You need to have at least a 10-year National Insurance contribution record to qualify for any state pension under the reformed system, and a 35-year National Insurance contribution record to qualify for the full amount.

Those who had built up state pension entitlements under the old system and had not reached their state pension age before 6 April 2016 had a ‘foundation amount’ calculated. This foundation amount was the higher of:

  • Total benefits built up under the basic state pension and additional state pension, with a deduction made to take account of any years the individual was ‘contracted-out’;
  • Total benefits the individual would have built up had the reformed state pension been in place at the start of their working life, with a reduction applied where the individual was contracted-out.

The idea behind this was to ensure those who had built up entitlements under the old system which were more valuable than the reformed state pension would not lose out.

Anyone with a foundation amount equal to the full flat-rate state pension at 5 April 2016 would not have been able to build up any extra state pension – even if they add more qualifying years to their National Insurance contributions record.

Those with a foundation amount below the full flat-rate state pension could continue to build up qualifying years via National Insurance contributions and boost their state pension entitlement.

People with a foundation amount worth more than the flat-rate state pension would receive the full flat-rate amount plus a ‘protected payment’ to reflect the extra entitlement built up under the old system. They would not gain any extra pension for further qualifying years they accrue.

While the flat-rate element of this pension will rise in line with the triple-lock, the protected payment increases by CPI inflation only.

WHAT IS ‘CONTRACTING-OUT’ AND HOW COULD IT AFFECT MY STATE PENSION ENTITLEMENT?

‘Contracting-out’ was an option previously open to people whereby, in exchange for lower National Insurance payments, employees agreed to opt-out of the additional state pension, meaning they would not build up an entitlement towards it.

For those reaching state pension age after 5 April 2016, any years they contracted-out will be deducted when figuring out your foundation amount.

You can check if you were contracted-out by contacting your pension provider or reviewing an old payslip. If you don’t have either, try the Government’s pension tracing service here.

CAN I DEFER TAKING THE STATE PENSION?

It is up to you to claim your state pension from the Department for Work and Pensions. However, it is also possible to defer taking your state pension – and you’ll receive an uplift for doing so. The level of this uplift will depend on when you reached state pension age.

For those who reached state pension age before 6 April 2016, the rate of uplift is 1% for every five weeks you defer, subject to a minimum deferral period of five weeks. This works out at a 10.4% increase in your state pension if you defer for 52 weeks.

Based on the 2021/22 basic state pension of £137.60 per week, this works out at an extra £14.71 per week if you deferred for one year.

For anyone who reached state pension age on or after 6 April 2016, the deferral rate is 1% for every 9 weeks they defer, or just under 5.8% for every 52 weeks.

This increase is applied to the flat-rate state pension. Based on someone receiving the full flat-rate state pension for 2021/22 of £179.20 a week, a person who deferred for 52 weeks would get an extra £10.42 a week.

Both of these examples assume there is no annual increase in the value of the state pension. If there is an annual increase, the amount you receive could be larger.

SHOULD I DEFER TAKING THE STATE PENSION?

Whether or not state pension deferral is the right option will depend on your personal circumstances.

For some it simply won’t be possible as they need the state pension income as soon as possible, while for others it might depend on their health and lifestyle. But if you are in good health then it could be worth considering.

Take someone who reaches age 66 in 2021/22 and is entitled to the full flat-rate state pension of £179.60 a week in 2021/22. If they defer taking this income for one year they will forgo £9,339.20 in return for an extra £10.42 a week for the rest of their life.

SO THE KEY QUESTION IS: AFTER HOW LONG COULD YOU ‘BREAK EVEN’?

Based on the state pension increasing by 2.5% each year, it could take 15 years to take as much total income via deferral as you could have done by taking the state pension at age 66.

For someone with a state pension age of 66, this implies the point at which they might be in ‘profit’ from deferring the state pension could be around age 81.

Given average life expectancy for a 66-year-old man is 85 and a 66-year-old woman is 87, this suggests that, provided you are in good health, delaying receiving your state pension could pay off financially.

State Pensions are a complex area as legislation has changed frequently over the last few decades. Whether or not you should draw on your State Pension at your State Pension age depends on your own specific circumstances. It’s a good subject to pick up with your I.F.A.

A great starting point would be to get an up-to-date State Pension forecast, these are the contact details for the dwp:

  • Or call the Future Pension Centre on 0800 731 0175 and request a paper copy

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

14/05/2021