by Samuel Dale
It has been a chastening month for Britain’s pensions industry as regulators and the government have finally cracked the whip on its excesses.
In a series of policy announcements the government has launched a self-proclaimed “full frontal assault” on the industry. Pensions providers have entered the realm of banks, energy firms and politicians with a special place of distain in British hearts.
To tackle the problems, the government has ripped up the existing rules on annuities in the Budget sending insurers’ share prices south. It has imposed a 0.75 per cent cap on pension charges from next April and imposed full transparency of all costs.
And in a further blow to the sector the Financial Conduct Authority is launching a review into close-book pension funds to make sure savers are being treated fairly. Again, this sent insurers’ share prices tumbling.
No one can seriously accuse the government of bowing to vested interests in the pensions industry. They are at open war.
Former chancellor Nigel Lawson tells me the pensions industry is “the most powerful in the land” and he found it difficult to take on so this is no mean feat.
For Labour this creates a major political headache. Shadow pensions minister Gregg McClymont has been one of the most effective opposition ministers. He has a superb command of his brief and has made the political weather on pensions regularly.
McClymont and Ed Miliband first called for a charge cap back in October 2011, dismissed as “scaremongering” by pensions minister Steve Webb. Labour also repeatedly table amendments to the Pensions Bill calling for full transparency of costs and charges.
The amendments were rejected by the government until it faced the prospect of a Lords rebellion and heavyweight opposition from George Osborne’s mentor, Nigel Lawson.
McClymont can also lay claim to raising problems of poor value in the annuity market calling for compulsory guidance at-retirement. The policy is now being introduced alongside Osborne’s Budget reforms to pensions.
A key danger of opposition is that if you have good ideas the Government can steal them and take the credit. Labour backs the charge cap and greater pensions flexibility so it is at a bit of a loss where to go next.
It could call for a lower charge cap of 0.5 per cent but the Government has introduced a review of the policy in 2017 to consider a lower cap. It’s opposition now lies in technical detail rather than fundamental principles so it needs a fresh new idea.
One area where it could create a clear dividing line with the other parties in its manifesto is a radical overhaul of pensions tax relief.
Today the government spends £35bn on pensions tax relief, rising to £45bn by 2018. The respected Pensions Policy Institute says it is “heaviuly skewed” to the rich.
Pension savers are reimbursed their income tax if they save into a fund so higher rate taxpayers get 45% of their salary back while basic rate payers get just 20%.
The coalition has already made big cuts to the lifetime allowance of tax relief from £1.8m to £1.25m.
This means when a fund exceeds £1.25m they can get no more tax relief, curbing some of the money going to the wealthy but Lib Dems want to cut further to £1m. The government has also slashed the annual allowance from £255,000 to just £40,000.
What is really needed is a radical rethink. The Pensions Policy institute poses one option for reform as a 30 per cent flat rate tax relief for all.
This would give those on the basic rate a boost and those on higher rates a cut, it is very progressive and backed by the Trades Union Congress. This could be portrayed as a transfer of savings incentives from the rich to the poor and not as a tax grab.
Voters will not respond well to taxing savings when the Government has been so liberal on annuities and is incentivising savings by increasing the ISA allowance to £15,000.
Osborne has shown that radical thinking on pensions and savings can pay off electorally, Labour can’t afford to concede the space to him.
The party is in a political corner on pensions but if it is radical it can regain the initiative and make the political weather again.
Sam Dale is a financial and political journalist
Tags: Gregg McClymont, Nigel Lawson, pensions, Pensions Policy Institute, pensions tax relief, Samuel Dale
Yep and it took the Tories to do it after the mess Brown made on Pensions, people I suspect will be thinking are the Tories a risk worth taking, while Miliband is tinkering the Tories are acting.
After all when the Tories come out with a cap on benefits labour runs after them agreeing with it, while labour are capping energy the Tories are cutting.
Will labour bring back the railways not likely they will cap fares at the top not cut them because once the cap comes off up will go the prices.
The issue is caps are a short term fix but policies are better, labour has none except to help t6he middle class.
The pensions budget bounce has now completely faded and will play no part in the General Election outcome. Pensions are too wonkish for that.
Moreover the fundamental problem of defined contribution pension saving has not been resolved – getting returns high enough to provide decent pots to cover off longer life expectancy.
Like most issues afflicting the country, that’s a problem in the fundamental structure of the low wage, low investment, low skills British economy. And Osborne has made that far worse.