There are perhaps three big pension election topics – the introduction of auto-enrolment, removing tax relief for the very highest earners, and the future of public sector pensions.
Each party is keen to show how it can drag the UK from the economic mire and the economic situation will cloud every election conversation, including those on pensions.
Auto-enrolment, as far as the political parties are concerned is a done and dusted topic. The legislation is in place and the Nest scheme well on its way to being built. But it will launch on the new Government’s watch and once the public – and employers – realise the true extent of the policy, there may be resistance, especially coming so soon after the recession. The new Govern-ment has to make sure that the policy is in peak condition, so could make changes to legislation to make it simpler and easier for employers.
Cutting tax relief on pension contributions for the very highest earners was aimed to raise immediate revenue for Government coffers but the mechanism brought in is a very blunt instrument and it will cause HMRC, pension schemes, employers and members many headaches.
A new Government may have the bottle to replace this unwieldy legislation with a simple alternative that has the same revenue-raising ability.
There is no doubt that pension savers will get a nasty surprise in a year’s time when their personal tax bills fall on their doormats. Many will stop saving in a pension, even if it is in their best interests to continue. A significant proportion of those will extend that decision to their workforce as well. This seemingly innocuous change could have wide-reaching implications.
But it is the third pension topic which will prove most tricky for the parties. The growing chasm between private sector and public sector schemes shows no sign of abating. But, on the other hand, there is no immediate impetus for a Government to take action. Each party wants to raise immediate revenue to help the UK’s balance sheet but closing defined-benefit public sector schemes and replacing them with defined-contribution alternatives will save no money in the short term and would be an additional expense. Private sector schemes have taken the decision that when in a hole, stop digging. But for public sector schemes, this is a future Government’s problem. Reducing pensions for hard-working nurses and firefighters is not an election winner.
So far, current Government policy has taken the view that raising revenue in the short term is more important than overcoming the longevity challenge. I hope that when it comes to pensions, future Government focus will be less on the next six months and more on the next 60 years.
Rachel Vahey is head of pensions development at Aegon