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What pension tax policymakers can learn from AE success

Light-bulb-innovation-idea-700x450.jpgIt is time for the Treasury to hand over pension tax reins

The Department for Work and Pensions has just released its automatic enrolment review, which points to various factors it claims are indicative of the policy’s success.

  • Between 2012 (when auto-enrolment started) and 2016, participation has increased among eligible employees from 55 to 78 per cent.
  • Those who have benefitted most traditionally had less access to workplace pensions, such as low earners, young people and women.
  • Total annual contributions into workplace pensions are at a 10-year high of £87bn (2016).

Full roll-out of auto-enrolment will be complete in 2018, with minimum contributions increasing to 5 per cent, then 8 per cent in 2019.

The report is clear the policy is working and has transformed pension saving for millions. So what has made it so successful?

Government cautious on self-employed in AE review

Let’s look at its genesis. Auto-enrolment sprang from work done around a decade ago by the independent pensions commission chaired by Lord Adair Turner. A key strategy for the commission early on was to build consensus and to depoliticise the debate.

This first involved detailed data analysis of the issues at hand. It then involved a meeting with major stakeholders to take them through the analysis, as well as various DWP-run events across the country, each attended by hundreds of ordinary savers.

The commission had cross-party input from the Conservatives and the Liberal Democrats, not to mention industry bodies and trade unions. It also created a safe space to air previously unspeakable suggestions, such as raising the state pension age. The resulting proposals were bold and had long-term vision.

This ethos of consensus and long-termism is also evident in the new report.

It sets out challenges and solutions to take auto-enrolment forward into the next decade, and these have been informed by an advisory group comprising various stakeholders, as well as a broad range of individuals and organisations. The report also highlights in several places the Government’s desire to “steward debate and develop consensus” on any subsequent developments.

Auto-enrolment to include teenagers under new plans

So if this approach has been so successful with auto-enrolment, could it be used elsewhere?

The answer is a clear yes. We face another “grasp the nettle” moment with pension tax policy. The decade since A-Day has seen various instances of tinkering for short-term gain and policy making on the hoof.

This is not sustainable. With auto-enrolment, the Government is sending out a clear policy message that it supports pension saving among workers. However, it risks seriously undermining this message if it continues to make short-term amendments to the tax rules with no broad consensus and no thought of how they fit into the bigger retirement picture.

What pension tax policy needs now is boldness, consensus and long-term vision. An independent cross-party commission would be the perfect place to start.

Martin Jones is technical resources consultant at AJ Bell

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. If the government makes something a legal requirement, with nasty penalties for non-compliance then, barring large numbers of members opting out, success is pretty well assured.

    • and linking back to the point in the article, if it is a legal requirement, then do we also need tax relief? Members are unlikely to opt-out over tax relief withdrawal; many are unaware of it in the first place and for those that are, the employer contribution is a much bigger incentive to stay in.

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