Conservative losses in recent local and mayoral elections, a recent string of by-election defeats and Labour extending its leads in the polls have led many to predict that Sir Keir Starmer will have the keys to number 10 after July’s general election – and with a considerable majority.
Although the polls may narrow as we get closer to the election, the bookies and most industry insiders are predicting a Labour win. But what could this mean for pensions policy? At present we have a broad outline of their plans, but this is conspicuously lacking in detail.
This outline is set out in ‘Financial Growth: Labour’s plan for financial services’, published earlier this year by the shadow Treasury team, and promising “an in-government pensions and retirement savings review” (See box).
So what does the sector make of this review and Labour’s wider plans? We spoke first to LCP partner Steve Webb, who was of course, pensions minister, in the coalition government.
He says the big picture is that a Labour government would face most of the same constraints as a Conservative one, with little capacity or potential to either tax more or borrow more. This he says is likely to lead to broadly similar policy solutions, including trying to get more ‘productive’ use of pension fund assets.
Labour has indicated support already for the current government’s drive for greater consolidation of smaller DC schemes.
Webb says it would be good to think that there could finally be progress on important areas,
like driving up higher AE contributions. But he anticipates headwinds. Labour is likely to be sensitive to cost-of-living issues, he says, particularly early on, so progress on implementing the 2017 AE review, which could double the contributions of some low earners, could be slow. In addition, he says the Treasury is likely to be wary of the tax relief cost of any expansion.
Finally Webb notes that on tax relief, Labour’s only firm pledge is to reinstate the LTA, but it has not said when, nor specified at what level. It would be impractical to implement it within months of an Autumn General Election, so 2026 looks like the earliest practical date he says.
Webb says he has seen hints that Labour would use the argument that the LTA has been eroded considerably by inflation since it was reduced to £1m in 2016 to justify a much higher figure.
He also suggests that it is possible that Labour would support DB superfunds and the PPF as a public sector consolidator, but perhaps not member choice.
He adds: “Labour will be keen to see the pensions dashboard over the line and will be undertaking a broad pensions review which is likely to occupy the first year or more of a new Parliament. More radical reforms, including potential changes to the structure of pension tax relief are likely to be under consideration at that stage.”
Consolidation plans
Royal London’s director of policy & external affairs Jamie Jenkins says: “Consolidation will likely continue to be a theme, partly to deliver the scale that in turn may ease the passage of investing in less liquid assets.
“The delivery of pensions dashboards is essentially the digitalisation of pensions and will inevitably be supported under any government as simply a function of modernisation. Delivered well, it could form the basis of many other policy solutions, such as dealing with small pots.
“It’s entirely unclear whether any of the proposals for lifetime provider or pot for life would continue under a Labour government. I suspect they would be keen to build on the success of the employer-centric model that they originally conceived for automatic enrolment, rather than risk dismantling it.”
The Pensions Policy Institute head of policy research Daniela Silcock finds the review very interesting and suggests it could grapple with some thorny issues.
She says: “Increases in inequality have led to the development of a secondary problem in which people leaving work are experiencing a greater and greater drop in income with more issues around how to support themselves up until state pension age. We need to delve a little deeper.”
She notes issues across the income scale, that include lower in-work benefits, the continued move from DB to DC, more people leaving work due to ill-health and caring responsibilities, and the problems of a higher state pension age and pension freedoms.
“All of these behaviours mean older people under the state pension age are more likely to be struggling financially. Also, people who’ve left work prior to the state pension age are more likely to have depleted some of their private pension savings and therefore have a lower income in retirement. So, I’m wondering whether their review will look at this specific issue.”
Adequacy issues
Related to this is the issue of pension adequacy, she says. “We’re looking at the level of private pension contributions. But what we haven’t got is a commitment from government in terms of how much they’re expecting the state, the employer and then the individual to provide related to what an individual needs.”
She says without a firmer stance on what an adequate level is, and who’s supposed to provide what, it is difficult to design policy that addresses this issue.
The Lang Cat director of public affairs Tom McPhail says that Labour may feel they have more room for manoeuvre around intergenerational tensions and notes that despite the Parliamentary Ombudsman report recommending some compensation, no promises have as yet been made to WASPI women.
“Labour have already said they’re going to review pensions without saying exactly what’s going to be in that review. I think there’s potentially quite a lot up for grabs.”
He recalls that Labour did not support pension freedoms at first, before bowing to its popularity.
“Let’s be honest – it’s not worked enormously well. There are a lot of issues around how we protect people from short-term rash decision making. I could certainly see Labour saying as part of this pension review, maybe we need to nudge people back towards guaranteed incomes and longer-term decision making.”
He says the bigger context is the cost of pensions, care and healthcare for older people likely surging towards 25% of GDP in coming years and the need for a “grown-up” conversation about the trade-offs.
“Does that mean a later state pension age or a means-tested state pension and maybe no state pension for some people. An incoming Labour government with a chunky majority could have some of those conversations. I’d throw tax relief into the mix as well. There is a question around how the state allocates its limited resources. Is giving higher-rate tax relief to mostly older, wealthier individuals what we want to be doing?”
The view from the frontline
What changes do corporate advisers think likely, or desirable? David Brooks, head of policy at Broadstone says that on big picture items, he sees very little difference in Labour’s pensions policy for occupational pension schemes and private pension savings.
“On consolidation, bigger is better. Fewer larger pension schemes will help both regulators promote and monitor best practice. It will also provide a level playing field for savers to get broadly similar experiences
and outcomes. Fewer small schemes mean higher allocations to private markets and productive finance. A Labour government would like this as much as a Conservative one.”
On DB, he says they will want an orderly but slightly faster risk transfer from DB schemes to insurers or consolidators, also allowing greater allocations to productive finance, provided the Solvency II rules can be relaxed enough to allow an allocation.
In terms of adequacy and appropriateness, an area where the Conservatives have not progressed he says, we may see the extension of the contribution rates for AE and also the expansion of ages.
“The Labour party has the opportunity to work out a way of helping those that need more pension savings to save more, but also ensure that this is targeted appropriately. Labour could, in their review, take steps to consider what auto-enrolment phase 2 should look like to ensure those in need are supported by the pensions system.”
Jenkins says: “This is arguably the area of policy that has been neglected since the introduction of AE. Increasing contributions has many challenges, given all the other pressures on the finances of employers and employees, but it seems abundantly clear that everyone will benefit over the long term. The experience in Australia shows very clearly that raising savings levels not only improves people’s retirement, but has huge benefits for the economy.”
Cavendish Ware’s director of strategic partnerships Roy McLoughlin says there is talk of reversing the LTA changes or exempting only some categories of occupation, but he says choosing which is surely “rather dangerous ground”.
It is interesting that the PPI’s Silcock suggests that Labour may better appreciate the complexities of applying different rules to different occupations when it is able to talk to department officials.
McLoughlin adds: “We also have the recurring “Halley’s Comet” rumour of a cut to higher rate tax relief. However, given that someone earning £50,000 now starts to pay higher rate tax that also would seem harsh. Plus, pensions are surely more about demographics than politics so discouraging contributions doesn’t sound right.”
He says other priorities should be the self-employed but also the pensions dashboard. “It is disgraceful it hasn’t happened”, he says.
For those in civil society, the Financial Inclusion Centre director Mick McAteer notes voices calling for a new pensions commission which he says should cover inclusivity but also adequacy and “how the state system interacts with the private system”.
Syndaxi Financial Planning director Robert Reid adds: “We need a well-considered plan. I am not interested in soundbite politics. We need to come up with a proper structure and a necessary part of that is education.”
However, he would like to see an acceptance by policymakers that some people are simply not making enough in their lives to fund their own pension provision. All very challenging for an at-least-for-now cautious Labour Party, as it looks hopefully at government.
BOX: The In-Government Reviews
This paper states Labour will “review the current state of the pensions and retirement savings landscape following the reforms of the early 2000s and the welcome introduction of auto-enrolment in 2012 to evaluate whether the current framework will deliver sustainable retirement incomes.
“This will mean working with industry and consumer groups to ensure savers are getting the best possible returns, and to identify and tackle the barriers to pension schemes investing more into UK productive assets – including cultural and regulation-induced risk aversion.”
On regulation, it adds: “For defined contribution (DC) schemes, Labour will give The Pensions Regulator (TPR) new powers to bring about consolidation where schemes fail to offer sufficient value for their members, and will ask TPR to provide explicit guidance around fund and strategy suitability, and their expectation of a default cohort investment approach. Labour will keep the minimum thresholds for scheme performance under review to ensure continued improvement in returns where possible.”
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