I haven’t read the reaction of the pension hierarchy to the Treasury’s consultation on the future of pension tax relief – I don’t have to. Steve Bee’s tweet
“I don’t want to spend the rest of my time on this planet being known as ISA Guru”
Sums up the reaction of many I have spoken to. For an industry that has got fat, the loss of EET appears “pension-apocalyptic”. But EET is grossly unfair and the unfairness has been compounded over the years by scheme design measures which have been aligned to the interests of the affluent stable end of the workforce.
There are a few notable exceptions, Michael Johnson is at the fore. Michael is promising more of his “bogoff pension analysis” and it will be published here. He has my support and that of Kevin Wesbroom, judging by Professional Pensions
Wesbroom proposes a ‘buy one, get one free’ model, also championed by Johnson, where the tax relief is converted to an explicit addition to the pension pot. He says this has “high intuitive appeal” but the price would be the switch to ISA-style taxation.
Why bog-off works
The “intuitive appeal” of bogoff is that it provides incentivisation from the public purse in a much fairer way. £200 paid into a buy 2 get 1 free arrangement yields the same tax incentive to someone paying no tax as someone on 45%. Under the current arrangements, the 45% tax payer would receive a subsidy of £90 , the non-taxpayer would get no subsidy at all.
This assumes a “net-pay” taxation system, the approach favoured by occupational pensions. For those few occupational schemes (NEST and Peoples Pensions spring to mind) that operate on a Relief at Source basis, the non tax payer gets £40 relief but still less than half than his wealthy colleague.
Why has Michael Johnson been ignored?
The continuation of the net-pay arrangements among larger schemes tells us something about the attitude to pension democracy among those who run these schemes. Despite their being more tax relief on offer under the Relief at Source system, occupational schemes have chosen to stay with net-pay, mainly because it gives immediate relief for higher rate tax-payers (who might otherwise have to wait for the top-slice of their pension tax relief at the end of the tax year.
This marginal tax-flow advantage has been to the major disadvantage of low earners and part-timers who (under net-pay) lose their incentives to save altogether. Any pension manager, trustee or consultant operating a net-pay arrangement and arguing that the current system of tax-relief should stay, needs to be able to explain how net-pay helps low-paid staff.
In my opinion, Michael Johnson has been ignored , is why a move to PRAS has been ignored. It is because most people in pensions actually enjoy the complexities of our super-complex system. It makes pensions special, keeps pension people in jobs and ensures that those jobs are valued at the wages that make higher-rate tax relief a holy-cow.
The pensions industry is , in-short, hopelessly compromised – and pension people the least able to see the wood from the trees.
I suspect that those opening the submissions to the Treasury’s review will have this in mind. If I were on that committees I would be preparing a big rubber stamp marked
They would say that wouldn’t they
And is pension saving any different from ISA saving?
Operationally, paying a pound into a pension plan is no different to paying a pound into an ISA. The DC pension industry has long since given up on paying pensions, that’s what DB plans do. Instead they have focussed on annuity purchase, drawdown and cash-out.
Only in places like New Brunswick in Canada and Holland has there been any real attempt to provide pensions directly from people’s DC savings.
When challenged to come up with a more ambitious approach to operating DC pensions, the pension industry sat back and scoffed.
When challenged to come up with a better system to measure and bring down pension costs, the pension industry sat back and scoffed.
If we had not had Government intervention, members would still be charged commissions for the distribution of advice that seldom arrived and savings plans that were coming (under auto-enrolment) anyway,
We had it coming!
Bottom line is that the pensions industry has failed to make DC pensions special and has not got a leg to stand on when it comes to special pleading.
Where do we go from here?
I would advise those in pension power to accept that the game for EET is up. Pensions can no longer rely on the cosy relationship with the Treasury that allowed them to coast for 30 years with no genuine innovation and no eye to treating (all) members fairly.
Where we go from here is to make pensions better. We make pensions better by focussing on outcomes. That means reducing costs by reducing the number of pension arrangements.
That means fewer larger schemes, with better governance and a focus on outcomes – not on distribution.
Funnily enough, the abolition of EET may be exactly what the pension industry needs to start serving its customers again.