Too often, chancellors see pensions as a short-term cash cow. That’s why we need a pensions minister who can stand up to the Treasury, argues Sara Benwell
Pensions have always been a bit of a political football. In the run up to an election promises are made to appease the grey vote but when government is in session successive chancellors have found it difficult to ignore the easy money that can be made by tinkering.
For a while, under the coalition government, we had a period of relative stability. But even former pensions minister Steve Webb couldn’t prevent the introduction of pensions freedoms – a measure which netted the government £200mn more tax than expected in the first 12 months alone.
In recent years the situation has worsened. Since leaving her role as pensions minister, Ros Altmann has repeatedly said that she was hamstrung, left out of senior meetings on key pensions issues.
The Financial Times reported that “final discussions were carried out by a working group at cabinet minister level, and junior ministers, such as Ms Altmann, were excluded as a matter of course”.
What chance will a parliamentary under-secretary have?”
Her successor will be Richard Harrington MP, but the pensions minister role has been downgraded to parliamentary under-secretary.This downgrading is a real cause for concern. If Altmann was excluded from talks on Tata Steel because her role was too junior what chance will a parliamentary under-secretary have?
And for some commenters it is yet another sign that pensions are increasingly being run by the Treasury, rather than DWP.
In some respects, this makes sense. Many of the issues that lie at the heart of pensions have direct impacts on the Treasury – and the setting of state pension age and tax considerations are decisions that have to be within the Exchequer’s control.
That’s all well and good, but the concern is that government short-termism could prove seriously damaging to pensions.
Altmann argued strongly against this short-term thinking in her resignation letter. She said: “As a minister, I have tried to drive positive long-term changes on pensions from within government… Unfortunately over the past year, short-term political considerations, exacerbated by the EU referendum, have inhibited good policy-making.
The former pensions minister is spot on. And the areas that the Treasury has most control over are where the most damage can be done.
A lifetime of saving
Pensions tax relief has always been low-hanging fruit when the Treasury needs a quick cash injection, particularly when it comes to lifetime and annual allowances. They’re easy to slash, they mostly affect higher earners, and they’re so complicated that many people don’t understand them in the first place.
If the UK economy takes a Brexit based hit – it’s easy to imagine these being slashed further.
There are a number of concerns here. The first is that by locking higher-earners out of pensions, you remove incentives for companies to provide great pensions benefits for their workers. If the financial director can’t use a well-matched scheme, they may focus disproportionately on other kinds of benefits – stock options for example.
The second problem is that it’s confusing and constant tinkering makes it difficult for people to plan effectively. While £1mn might seem like a lot of money, a lifetime of compound interest could put middle-earners who have prioritised saving at risk, particularly those in the public sector.
Pensions tax relief has always been low-hanging fruit when the Treasury needs a quick cash injection”
The final concern is that if we see lifetime allowances reduced much further – say, to £750k or £500k – it could start having a severe impact on people on lower-to-middle incomes. Estimates from Nutmeg suggest that a fund worth just over £442,000 would be required to replicate an annual income in retirement equal to the average wage of a UK worker at £26,500.
As longevity estimates rise, people will need more and more money to sustain them through old age. And most of these estimates assume that people own their own houses. If young people continue to be locked out of the property market, a generation of retiree renters will need significantly more money in their pensions.
Fundamentally, the UK is trying convince the DC generation to save more. It’s crucial that employers aren’t put off from offering good matching and that young people aren’t put off from saving altogether.
Altmann commented: “I have never supported the Lifetime Allowance or the complex taper for top earners. It makes no sense to penalise positive investment performance. Limiting the contributions is sensible to control cost, but having a Lifetime Limit on accrual makes it impossible to plan pensions properly.”
ISAs aren’t always nice
Another widespread concern is that the Lifetime ISA is just the thin end of the wedge, paving the way to a wholesale replacement of pensions with Tax, Exempt, ISA-style vehicles.
It’s easy to see why a short-termist Treasury might go there. When the idea was first mooted, Webb cautioned that the government was carrying out an undercover £4bn raid on tax relief – as the 25% tax free cash bonus would vanish. And the Treasury would get an upfront cash injection from the tax on pensions savings.
This would be a disaster. As ISAs currently have no restrictions on when you can take the money (even the Lifetime ISA, a supposed retirement vehicle, let’s you take out all the money early to buy a house) it’s hard to see how we would guarantee that anyone had anything left over for retirement.
Altmann said: “I believe it would be a disaster if pensions are turned into ISAs. An ISA is not a pension and indeed as it is an ISA and can be withdrawn in full tax free, there will be an obvious incentive to take the money out as soon as possible. Which means there will be no money left when [people] really need it later on.
“Turning pensions into ISAs increases the risk of rising pensioner poverty but of course that will only happen in the long term, when today’s politicians are gone and a future government has to remedy the consequences.”
Who wants to work forever?
The final quick win for the Treasury could be to raise the state pension age faster than expected. According to the PPI, the government spent £78bn on state pensions in 2014/15 and the combination of the triple-lock guarantee and rising longevity estimates mean that this will only go up.
By raising the state pension age, the government could seriously reduce the welfare burden.
However, there are questions to be answered around how long we can reasonably expect people to work. And the recent WASPI campaign highlighted the risks the government faces if it does not communicate changes properly.
The Treasury is planning to take control – he may be doomed to fail”
Fortunately, the John Cridland review suggests that on this issue the government is prepared to take a longer-term view. But if public finances are in a mess, the Treasury could decide that the pickings are too rich.
Pensions are a long-term savings vehicle, and with an ever-ageing workforce working out how to get people comfortably into retirement should be top of the government’s agenda. With a Pensions Bill around the corner, we need a strong pensions minister to present long-term plans to the Treasury and fight to get the best possible deal for savers.
Richard Harrington may well be that man, it’s too early to tell. But if the downgrade of the role is a sign that the Treasury is planning to take control – he may be doomed to fail before he’s even begun.