The new Government top team is set to further cement the Treasury’s all-powerful position as the organisation driving financial services and pensions policy.
Prime Minister Theresa May has lost no time following her appointment in clearing out David Cameron’s allies, notably George Osborne as Chancellor and Ros Altmann as pensions minister.
Now that we know the shape of the new Government, it is worth examining who are the people at the top of Government, and the kind of policies financial services firms should expect from them.
Osborne’s pet projects such as the Lifetime Isa, pension tax relief reform and the creation of the secondary annuities market all hang in the balance.
There is also the question of whether we will see a snap election, as well as whether these are the right people to negotiate the best terms possible for the financial services industry as we agree our exit from the European Union.
The senior team in Government represents a radical departure from the Cameron/Osborne era, and signals huge implications for the UK’s pensions and tax policy over the coming years.
Osborne vs Hammond
As the new Chancellor, Philip Hammond is expected to take a very different approach to the “rabbit out of a hat” attitude financial services came to expect from Osborne.
Cicero Group executive chairman Iain Anderson says: “Hammond is cool, calm and collected. A very detail orientated and thoughtful person. Osborne liked to have the big canvas, the big policy and the big surprise. Financial services policy is going to be a lot more thought through, with fewer surprises and more consultation.”
Anderson does not expect to see pension freedoms changed or added to. But he forecasts May’s mantra of a “Government for everyone” will be translated into attacks on executive pay and the pensions of higher earners, alongside a greater focus on what works for “Middle Britain”, for example through changes to auto-enrolment.
Lansons director Ralph Jackson says pension saving has been transformed over recent years, but questions whether savers have ultimately benefited.
He says: “Osborne has clearly been a reforming chancellor, and he has had to steer the economy through incredibly difficult times, with the focus on deficit reduction at the heart of that. He has been bold through pension freedoms, and also tried to innovate with tax and pensions policy.”
But Jackson admits the former chancellor’s approach to driving through reform such as pension freedoms without always consulting the industry has not won him many friends.
He says: “Osborne was never particularly inclusive in the way he managed the economy. For the bigger opportunities like the Budget or the Autumn Statement, he tried to pull something out of the hat to generate some form of good news for savers who were struggling, and others had to pay for that.
“But by and large, the economy has come through a difficult period. He was a reforming chancellor, but not one who was easily liked by many people.”
Anderson adds May has been definitive in saying Osborne’s economic policy has not worked for everyone. He suggests the new Prime Minister may look to make a “clean break”, and innovate beyond simply coping with Brexit. He believes one of the things that could come under scrutiny is whether the current “twin peaks” set-up of regulation between the FCA and the Bank of England is the right one.
What comes off the table?
In the wake of a Government reshuffle, and with resources diverted to developing a strategy on Brexit, existing pension policy initiatives have been called into question.
Former pensions minister Ros Altmann, who left the Government last week, has already come out fighting. As Money Marketing reported earlier this week, Altmann wants to see Osborne’s flagship Lifetime Isa product scrapped on the basis it discourages adequate pension saving.
Jackson says: “May and Hammond’s focus is going to be on economic stability. The Autumn Statement will be important as a means of achieving this, and will be different to the one Osborne would have delivered.”
He says initiatives such as the Lifetime Isa, pension tax relief and secondary annuities may not see the light of day.
He says: “All of those things are always up for review any time there’s a new team in place. The key issue in the Department for Work and Pensions will be whether or not things like secondary annuities or pension tax relief reform are still appropriate when looking at the bigger picture.”
But former pensions minister Steve Webb believes the Government will continue to be wedded to at least some of those big ideas.
Webb, now director of policy at Royal London, says: “There’s a sense of the Government wanting to be seen to be doing things. The risk is if all you’ve got is Brexit and austerity, that’s a pretty meagre programme. Stuff that has already been announced and is in motion has the best chance of still happening.
“The Lifetime Isa is likely to be quite popular, and coming from the Foreign Office Hammond may not be coming in with profound views on tax policy. The civil service has also had a pro-Isa world view for at least six years. There is a lot of momentum there.”
He argues while the Lifetime Isa costs money, it would be quite early on for the Treasury to reverse that.
Webb also points out secondary annuities are expected to raise money for the Exchequer, and says he would be surprised if this initiative was shelved at this point.
The role of the Treasury
Under Osborne, the relationship between the Treasury, the FCA and the DWP was that it was the Treasury deciding the direction of travel on financial services policy. Jackson expects this to continue, with the Treasury likely to continue to dictate the pace of pension reform.
Yet both Altmann and Webb are concerned the Treasury is not going to simply set pensions policy, but damage the role of pensions in the political hierarchy.
The new pensions minister has been named as Watford MP Richard Harrington. Altmann and Webb had the title minister of state for pensions, while Harrington carries the less lofty title of parliamentary undersecretary of state at the DWP.
Altmann says it is worrying the pensions minister role seems to have been “downgraded”, adding pensions are too important to downgrade.
Webb says the constant fiddling with pension tax relief already served to undermine the overarching goal of boosting long-term saving.
He says: “Ros acted as a counterweight to the Treasury, particularly on Lifetime Isas and the pension Isas idea. I am sure she will have been privately lobbying ministerial colleagues, and frankly, sometimes she did so in a barely coded way in public. That’s been her biggest contribution, being that strong voice to say it’s not just the Treasury world view that prevails.
“The worrying thing about the new set-up is the Treasury becomes even more dominant. Even within the DWP, let alone Government, pensions are at the back of the queue.”
Given May’s rapid accession to become Prime Minister, the prospect of another election has been floated to ensure the Government has public backing to run the country.
But political commentators say this is unlikely.
Jackson says: “A snap election would be the worst possible nightmare for May. She has said the Conservative Government continues to have a mandate from the British public, as they were elected last year on a campaign which manifestly included a referendum on the EU which has since been carried through. Going back to the electorate is difficult, as voters are clearly in the mood for change and the winners are likely to be fringe parties rather than the main ones.”
Anderson says it is quite clear to see Labour is in a “very dark place” and it will be hard for the Opposition to come close to winning an election, now or in 2020.
He says: “The big that usually changes politics is how the economy is doing. There is a concern that the UK enters a recession early next year, and if that is the case that is the last time you want to be holding a general election.”
Clearly, the new Government also has the not-so-small matter of Brexit to contend with. Financial services firms that want to lobby for an EU exit that suits their business will have to get to grips with the new world order.
Anderson cautions against firms going in to fight their corner on the basis they will be able to convince the Government that the Leave vote can be unravelled.
He says: “There is an awful tendency by a lot of people in financial services to rock up in front of those in Parliament and say ‘we know best’. This is more than misguided. If the financial services sector turns up with an argument that says ‘let’s not do this Brexit’ they are going to be met with a very short shrift indeed. The Leave vote cannot be undone.”
Anderson adds: “We are going to see a lot less testosterone in our politics, and we need to see less testosterone in financial services firms as well.”
“I suspect Brexit will suck the air out of everything and further reforms will be put on the back burner.
“My fear on pensions is we’ll go back to having a succession of different ministers in charge, few of which will really understand the brief. This could hamper long-term planning.”
“With so many big departmental figures gone it is difficult to know what might be in store.
“I wouldn’t be surprised if proposed reforms like the secondary annuity market did not see the light of day. But the Treasury’s drive to reduce pension tax relief may mean the Lifetime Isa is still part of the future savings landscape.”
Who’s who in the Govt top team?
Theresa May takes the top job in UK politics after a six-year stint at the Home Office.
She has considerable financial services experience, working at both the Bank of England and the Association of Payment Clearing Services before becoming a Conservative MP in 1997. In opposition one of her roles was to shadow the Department of Work and Pensions.
May has commented in recent years on the UK’s “over-reliance on financial services”.
The new Chancellor is seen in political circles as a “fiscal hawk”, and has made clear one of his priorities is to safeguard financial services throughout the Brexit negotiations.
He has considerable experience in Government, including as Secretary of State to the Foreign Office and Defence and Transport Secretary. He has also previously acted as shadow to the chief secretary to the Treasury.
Damian Green replaces Stephen Crabb at the DWP. Green previously shadowed this department in 1998, but his more recent political appointments have been in the home office, working with Theresa May. He was a financial and TV journalist before becoming a politician.
As Secretary of State for Exiting the European Union, David Davis is charged with overseeing the Brexit negotiations.
He has had roles at the Foreign Office in John Major’s government and in opposition was shadow home secretary.
He has been a prominent advocate of Brexit. In 2010 he chaired The Future of Banking Commission, which investigated the causes of the banking crisis in the UK.
Ros Altmann in conversation with Money Marketing on her tenure as pensions minister
I am not a politician. I can do good policy if you want it but good politics does not seem to be my forte. I never wanted to be a politician – I just wanted to help make good policy.
The impression I had was that some of the tax and pensions policy had been driven by the short-term agenda ahead of the referendum. My genuine hope was that after the referendum, and I had hoped we would vote to remain, that the political situation might settle down and we could get back to making good, longer term policy. Unfortunately that was not to be.
I had a conversation with the Prime Minister and gave her my views and my ideas. I had hoped that the short-term politics that had got in the way ahead of the referendum would not continue to get in the way, but it did not turn out like that, which was a real shame.
I wanted to improve pensions for millions of people which is what my whole career has been about. But I will still be in the House of Lords and still be hoping to influence and address policy as it goes through the House.