By David Brooks, Technical Director at Broadstone
The Governance of Defined Contribution schemes did (and still does) need a shake-up. Opaque charging structures and confusing literature was leading to members making poor decisions and needed to be reviewed. A key motivation following the success of auto-enrolment may have been to avoid the scenario in 30 years’ time of people, having been auto-enrolled, only for those schemes not to be up to scratch. The political repercussions being that the Government did not take auto-enrolment delivery seriously.
The state-pension reform may become the project he is best remembered for, while the success or failure of it will fall on his successor. Simplifying a system was always going to be a difficult task and while there are winners and losers (there isn’t space to discuss that here today, perhaps later in the year) this will succeed in controlling and most likely reducing the cost of providing state pensions with cross generational impact affecting the young more than the old. A younger generation more reliant on DC could mean we are storing up major problems for the future and may not be the legacy that Steve wanted.
Of course I also have to mention his successor Baroness Ros Altman. She is in a unique position (at least for a Pensions Minister) of having an established track record and reputation in the industry as well as taking an unelected role in Government. She has a strong reputation for standing up for the consumer (member) but also for criticising government policies, which she may now need to publicly support. One proposal she had in particular, a change in the MP pension arrangements from DB to DC, would be an interesting conversation to sit in on if she decides to push that. It is a compelling argument to insist that those that govern us have personal experience of the types of pension the majority of the private sector are in.
As I write this prior to the “Emergency” Budget my twitter feed is reeling with thoughts from some of the brightest minds in pensions, each considering what change is going to confront us next. We have become so accustomed to change over the last nine years that we are speculating on the next blow to land.
Some remain convinced of the parlous state of tax-free cash, the fruit hanging so low that it seems too hard not to lop it off, but the fact it has clung on for as long as it has suggests it will survive. We are already prepared for the much publicised changes to the level of Lifetime Allowance and Annual Allowance, for high earners, the expectation is that the next major change will be an end to Salary Sacrifice. A Chancellor with no money and pledging not to raise income tax must look somewhere to raise revenue and it must be very tempting for the Chancellor to shave the reported £15 billion in tax and NI breaks delivered through salary sacrifice. It is expected that, if announced, a consultation would be launched to explore options to cap salary sacrifice, close the offer to new schemes (which could create a gold rush of employers ahead of any restrictions) or abolish it completely. However, it could be a fool’s errand with employers open to the option creating a non-contributory scheme or employees open to renegotiating employment contracts effectively constructing salary sacrifice by the back door.
However, these issues highlight the level of expectation on what Ros can deliver in her role. The Pensions Minister’s role is primarily one of governance and process. Unfortunately the juicy powers around the taxation of benefits rests with George Osborne and I question the views of Ros being taken up in any meaningful way by the Chancellor. Ros may be in the difficult position of defending publicly policies she has previously criticised. This is easier for chameleons like politicians but, I suspect, less easy for someone from outside that environment.
This continues to be an interesting time in pensions and its interaction with our legislators and I look forward to documenting this journey for you here at the Actuarial Post.
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