While Rome burns – or at least the future of UK pensions continues to do so – the Bush administration has come up with a radical simplification of the strategy for lifetime savings.
The White House, viewed from outside the US, appears to be focused entirely on Iraq, but the administration has been focused on the pension and savings gap.
Announcing his budget package, President Bush said: “Americans can help secure their own future by saving. Government must support policies that promote and protect saving. Saving is the path to independence for Americans in all phases of life and we must encourage more Americans to take that path.”
In the case of the US, we seem to be getting action and not merely more consultation. The UK Government's Pensions Green Paper will not end its consultative stage until Easter. The likelihood of legislation in 2004/05 seems remote.
So what does the US budget package contain? The first proposal creates a lifetime savings account. To be fair to the UK authorities, many of the characteristics of this proposal are contained within the Isa.
The new LSA will be a tax-favoured account which can be used for any purpose – education saving, healthcare and so on. The really imaginative thing is that it allows any individual, regardless of income or age, to contribute $7,500 a year and make as many withdrawals as desired tax-free.
This is an important milestone in savings policy which the UK Government should consider carefully as part of the Sandler review of savings and the development of cradle-to-grave concepts such as the proposed child trust fund.
The ability of an individual, regardless of age, to invest in a single account for saving is a significant step. The other interesting feature is that the contribution limits will be indexed, allowing real growth in savings potential, freed of the constraints of inflationary pressure.
This is something that the Pep and Isa Managers' Association has long been lobbying for in the UK.
Bush's assistant treasury secretary Pam Olson believes the LSA will encourage more low and middle-income families to save. Certainly, the UK experience with Isas has shown this but the LSA builds on the Isa structure in a way which we ought to consider in terms of savings design in the UK.
However, perhaps the more important milestone is the creation of retirement savings accounts and employer retirement savings accounts.
In one move, the Bush administration is sweeping away around five or six differing pension regimes and replacing them with one personal or employer-based option.
Under RSAs, individuals will be able to roll up income for pension use completely tax-free. After 58 – or, importantly, after death or disability – tax-free distributions can be taken. In terms of holistic tax and benefit planning, this is a significant step in the right direction.
According to the US treasury's document: “There are currently multiple tax-preferred employer-based accounts all with similar goals but differing rules regulating eligibility, contribution limits, tax treatment and withdrawal restrictions.”
Anyone reading those lines might have thought they were attending one of Steve Bee's Scottish Life pension roadshows or reading a Stewart Ritchie pension policy briefing from Aegon.
In one clean sweep, Bush is making retirement saving less complicated, which should prove to be extremely popular for financial consumers. He intends to get rid of 401(k) plans, thrift plans, 403b schemes and governmental 457 plans. The aim is to provide the same basic structure as an RSA but within the framework of work.
In the US, only about 50 per cent of employees take up their company pension. The US treasury hopes this package will increase coverage and participation because firms are put off providing retirement savings options for employees due to the complexity and cost.
The US treasury says: “The reduction in red tape will remove a barrier that discourages small business owners from offering this benefit to their employees.”
These plans are designed to come into effect on January 1, 2004. I think this is a significant step in the right direction.
The Bush package goes a long way towards coming up with innovative and workable solutions to encourage cradle-to-grave saving and improving the attractiveness of employer-based retirement savings.
The UK Government would do well to cast an eye over these proposals and look to incorporate their best elements into any future legislation here.
We should not continue to fiddle while Rome is on fire. Perhaps a trip across the pond for Treasury ministers and officials might help to dampen the flames that are engulfing pensions and savings in the UK.
Iain Anderson is director and chief corporate counsel at Cicero Consulting