The political maelstrom following the referendum vote to leave the European Union (EU) has caused several members of the industry to voice concerns around the new government’s approach to pensions.
Some argue they will become less of a priority while others think that that they will pursue policies that the industry deems unsuitable.
One big change to pension-related government was the exit of Ros Altmann from her role as pensions minister. Altmann, who was made a Baroness by David Cameron in order to take up the role, voiced concerns after her decision to leave that the role of pension minister had been downgraded. The pensions minister is now a parliamentary undersecretary rather than a minister of state.
Altmann said: “It is not clear why the government has done this, but in my view pensions are too important to downgrade. Pensions are also complicated and it is important to have someone in charge with knowledge of them.”
Unfortunately, Altmann’s replacement, Watford MP Richard Harrington, does not have this sort of experience. His previous role in government was as parliamentary undersecretary of state for Syrian refugees.
Altmann said: “If the downgrading of ministerial responsibility in Department for Work and Pensions (DWP) reflects a move to joined-up policy within the Treasury, then that would make some sense. But if it poses threats to major planks of pensions policy, then we should be very worried.”
Seniority matters
Another ex-pensions minister, Steve Webb, currently director of policy for Royal London, also expressed concern about the downgrade. He described the decision as “a shock”, and argued that the seniority of ministers really does matter, not least in dealing with other government departments such as the Treasury.
He added: “The DWP has lost a powerful voice in fighting the corner of workplace pensions with the resignation of Ros Altmann. This new decision is a demotion for pensions and sends a worrying signal to all who are concerned about the long-term financial health of the nation.”
Webb also argued that a government focused on disentangling EU from UK law and facing some economic slowdown will not have the resources or inclination to focus on the most pressing issues for pensions.
He said: “Officials and lawyers in all government departments will be consumed with the enormous task of separating EU from English law over the next few years and so will have little time to focus on much else.”
Webb argued that as a result any changes to the financial services sector will be ad-hoc and made to save money. They are likely to include changes to pension tax relief.
Adviser Home director Brendan Llewellyn tried to put a positive spin on the decision: “It is hard to pre-judge a government. The downgrade of the pensions’ minister role might mean that the person above this will take more of a primary role, perhaps the Chancellor wants to take control.”
He added: “There has been a lot of navel-gazing and the operation of policy hasn’t been the dominant factor – I hope they don’t lose focus – we need to look outside and focus on the main policies.”
Priorities for the new government
As Altmann left, she gave her successor three areas of suggested focus. She cited tax relief that would end discrimination against the lowest paid; addressing defined benefit (DB) pension scheme deficits; and communicating information around state pensions for women.
But does the industry agree that these should be the main areas of policy change? And if so, what might the details of such policies be?
Tax relief
The industry debate around the best pension tax relief system has been ongoing and most industry commentators agree with Altmann that this is an area requiring attention. Under the current system, the most well-off savers benefit more than the least well-off.
There was speculation prior to the April budget that the then Chancellor George Osborne would opt for an ISA-style pension to save the government money (tax relief is provided at withdrawal rather than deposit), or a flat-rate tax relief system to benefit the less well off. Osborne did not take this option but rather introduced the Lifetime ISA (LISA) which some think is a step towards a pension overhaul of this sort.
Prudential retirement expert Vince Smith-Hughes expects the new government to pursue an ISA-style approach to pensions. He said: “The LISA is the first step towards a new system of tax relief. Brexit will exacerbate the need for the government to save money and make the move towards a system like this more likely.”
However, Aviva head of policy John Lawson downplayed the importance of the LISA and argued that a traditional pensions approach is better for savers. “We don’t think the LISA affords any great advantage, it doesn’t make sense in terms of tax benefits to come out of a pension scheme and into a LISA for example.
“Also, the scheme depends on the government of 2037 not to tax money on the way out. People just won’t trust a future government to uphold this commitment.”
Lawson does believe a fairer tax relief system should be a priority for the government, though. He said: “Earlier this year we proposed a flat rate of 33%, Altmann suggested a flat rate of 25% but either would be better than the current system in terms of providing an incentive for those savers with least money.”
But he also recognised that this sort of work might be beyond a government so caught up with other issues, it would be a “big project,” he said.
He suggested that some tax relief adjustment is still feasible for such a government, particularly around lifetime and annual allowances because providers and the industry have dealt with changes to these allowances in the past. “These tweaks would save the government money and will not be too time-consuming to implement,” he said.
Defined benefit schemes
A government that addressed defined benefit (DB) deficits would receive considerable support from the industry, but again, this is a complicated issue for an otherwise occupied government to tackle. Similarly, how a government should address the issue is up for debate.
Lawson said: “The problem with DB schemes is that the majority rely on low-risk government bonds and gilts, which tend to offer a return of under 2%. Companies opt for these low-risk asset classes to de-risk their balance sheets but this tends to leave the pensions schemes in deficit.”
He added: “Companies might be able to resolve their DB deficit issues if they put funds in some central scheme with a guaranteed fixed cost that is able to take risk by putting a higher percentage of savings in equities. The problem is, I’m not sure how you would do this without changing international accounting standards.”
State pensions
The third issue raised by Altmann is one she campaigned for throughout her time as pensions minister – fair treatment for women and better communication on state pensions.
Altmann said that while she respected parliament’s decision to increase the state pension age, she was not convinced the government had “adequately addressed the hardship facing women who have had their state pension age increased at relatively short notice”.
Smith-Hughes concurs that communication was not been adequately addressed by previous governments. He said: “Although many women have taken career breaks most don’t know they can make voluntary National Insurance contributions when they come back to work. That was never really publicised.”
He added: “Industry and other pensions bodies have a role to play here too.”
Aviva’s Lawson describes better communication on the state pension as “essential”. He said: “Some 45% of retirement income on average comes from the state pension and so it is a big issue, but the private sector is doing a lot of work to help disseminate information.
“We recently sent out a newsletter on state pensions that was every bit as good if not better than the information being sent out by the state sector.”
Like many big providers, Aviva is also working had to develop the ‘pensions dashboard’ which will contain information related to state and private pensions.
It remains to be seen how Prime Minister Theresa May’s new cabinet will fare with regard to each of these areas of pensions’ policy, but the industry seems unanimous in where it thinks the focus should be – let’s hope the government listens.
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