New Labour government

What did the Labour manifesto say?

Whilst short on detail, the manifesto did highlight some plans for pensions:

• The government will carry out a wide pensions review in order to improve member outcomes, ensure schemes take advantage of consolidation and scale, and to increase productive investment in UK markets. However, the precise scope of the review is not yet clear. We note that the consolidation and productive investment themes are ones that were also being pursued by the previous government.
• Labour has dropped its plans to reintroduce the Lifetime Allowance and has no current plans for further changes to pensions taxation. However, this falls short of an outright commitment to leave pensions tax alone. Having ruled out increases in income tax, corporation tax, national insurance and value added tax, pensions might be seen as a convenient target for ‘stealth’ taxes when fiscal circumstances are tight. Possible measures include:
  • bringing the undrawn pension pots of DC members back within the charge to inheritance tax
  • once more charging income tax on all withdrawals from inherited DC pots, regardless of the member’s age at date of death.
  • charging employees NIC on the value of their employer’s pension contributions – though this would be both politically and practically difficult, particularly in the absence of wider tax reforms.
  • reducing or removing the level of tax-free cash lump sums on retirement.
• Pension funds and other institutions will be required to devise and implement transition plans that align with the 1.5°C goal of the Paris Agreement.
• The state pension triple-lock will be maintained.
• As part of the “new deal for working people” they proposed setting up a Single Enforcement Body. This could see greater scrutiny being applied to the policing of Auto-enrolment compliance, getting into checking not just whether contributions are being paid but whether they are being paid at the correct level.
• Whilst not pensions-related, it is worth noting a plan to expand gender pay gap reporting to also cover pay gaps based on ethnicity and disability. This would include a new requirement for large companies to not only publish their gender pay gap but also to implement action plans to close the gap. You can find out more about meeting the existing requirements here.

Measures underway

Regarding the ongoing initiatives of the current government, many, such as dashboards and multi-employer CDC, are uncontentious and likely to continue as planned. However, there are some areas where we are not certain of Labour policy (such as extension of auto-enrolment, DB surplus extraction and the PPF as a public sector consolidator).

There are still others, such as scheme funding, where the overall direction of policy is likely to continue but the incoming administration may wish to vary points of detail or emphasis – quite likely leading to further delay. Much may depend on how the new Pensions Minister defines their priorities.

What the pensions industry wants

Pensions and Lifetime Savings Association

The PLSA suggests 5 key priorities for the next government:

Supporting adequate pension saving

• Including extension of auto-enrolment (saving from the first £1 of earnings, including gig economy workers and from age 18), with a gradual increase of contributions to 12% aggregate by the mid-2030s, split 50/50 between employees and employers

Helping savers navigate their choices at retirement

• Including a statutory duty on trustees to offer decumulation support and guidance for members

Supporting well-run defined benefit (DB) schemes

• Ensuring that the DB funding code offers more investment flexibility for open schemes and closed schemes with long investment time horizons
• Implementing a Superfund regime that offers members at least the same level of protection as the DB funding regime
• Legislating for easier surplus sharing in DB schemes with protection of member benefits.

Bridging the pensions and growth gap

• Supporting the ongoing work on Value for Money (VfM) to achieve more focus on performance and less on cost

• Identifying a pipeline of investible opportunities to support UK growth whilst achieving the necessary risk-return and cost characteristics; and using fiscal incentives to make investing in UK growth more attractive than competing assets

Supporting the Local Government Pension Scheme

• Developing common governance standards

• Fostering effective relationships between pensions funds and asset pools with a focus on the type and quality of outcomes administering authorities should aim to achieve

Association of Consulting Actuaries

The ACA has called for the following policy initiatives:

Commitment to completing current reforms

• Including launching Pension Dashboards, completing Value for Money initiatives, extending AE coverage, finalising the new DB funding regime, and expanding coverage of CDC schemes

A fresh boost to auto-enrolment

• Including increasing minimum AE contribution to at least 12% over the next 10 years (with costs shared between employees and employers) and expanding coverage to include the self-employed and those engaged in the gig economy

Ahead of AE step-ups, introduce flexible “sidecar” savings to encourage voluntary savings above AE limits

• Tax-efficient Sidecar savings (above AE minima) that benefit from tax relief could be used for multiple savings purposes, with greater access flexibility for resilience needs

Introduce a default CDC provider for individual decumulation

• This would operate in the same sort of way that Nest does for DC savers

Avoid knee-jerk changes to the pensions tax regime

• Pensions are a long-term undertaking and stability is essential

Replacement of the State Pension triple lock

• The ‘triple-lock’ should be retained only until 2026 while a full review of the appropriate level is carried out
• From 2026, State Pension should increase in line with earnings
• There should be a 5-yearly review of the level of the State Pension which could reflect other factors such as general inflation over the period

Ideas from the think-tanks

Institute for Fiscal Studies

The IFS proposes 5 tasks for the new government:

Decide whether and how to improve support to those who struggle to work up to State Pension Age

• Including whether to bring forward the legislated increase in State Pension Age from 67 to 68

Put in place a long-term plan for the level of the State Pension

• Including assessment of the cost of maintaining the ‘triple lock’

Decide whether to increase minimum workplace pension contributions

• Including how to help low earners adjust to lower take-home pay if the amount they contribute goes up

Decide how to address the problem of low pension saving among the self-employed

• Possibly by integrating pension saving for the self-employed into the Self-Assessment tax system

Develop and implement policies to help people draw on their private pension wealth through retirement

• Possibly including more use of default options to help those who have low understanding of and/or engagement with pensions.

Separately, on pensions tax, the IFS proposes a package of measures to include:

• Further restriction of tax-free cash on retirement, implemented in such a way as to reduce the subsidy to higher rate taxpayers
• Member contributions to receive relief from employee NIC – but pension withdrawals gradually subject to employee NIC
• Employer NIC to apply to employer pension contributions alongside a new flat-rate subsidy on those contributions (so as to ensure a uniform incentive for all employers regardless of NIC actually paid)

Social Market Foundation

Having set out the principles it believes should underpin the pensions system, the SMF sets out a proposed new framework:

A larger, but later, Senior Citizen’s Pension, supplemented by means-tested benefits

Default ‘auto-protection’ for defined contribution pot decumulation with the ability to opt out:

• ‘Auto-drawdown’ of between 4% and 6% of pension pot assets per annum over a finite 15 year period from ages 60 to 75, and
• ‘Auto-annuitisation’ of residual pots at the age of 75 to collectively hedge individuals’ exposure to risks of longevity and remove later-life exposure to investment market and inflation risks

Pay bonuses, instead of tax relief, on all contributions to pension pots

• To help generate a broad-based savings culture rather than one targeted towards higher earners

An enhanced automatic enrolment framework to broaden participation

• Members of workplace pension schemes would have the right to choose the scheme into which their contributions are paid, and with new Workplace and Self-Employed ISAs.

Tony Blair Institute for Global Change

The Institute proposed the following measures to boost savings and prosperity for the UK.

Create a GB Savings superfund

• Turn the PPF into a superfund – GB Savings
• DB schemes would be able to enter voluntarily with payment of a capital buffer
• The smallest DB schemes should be prioritised for entry
• NEST would also be folded into GB Savings

Incentivise consolidation in DB pension funds

• Tax advantages to only be available to funds >£25bn
• Funds would be required to have a minimum share invested in UK companies and infrastructure assets

Extend the benefits of consolidation to DC pension funds

• DC funds should be encouraged to move into a superfund

Create a sustainable future for public-sector pensions

• Look to transition to move the currently unfunded public sector schemes to a funded structure

Create the option for future GB Savings superfunds

• Expand GB Savings to have more funds, probably using the LGPS funds or large multi-employer funds as the provider of seed funding