Sterling’s a great indicator of how experts really see a budget and yesterday Sterling fell against a basket of major currencies. We may have liked our sugar tax and our Lifetime ISA but the pound fell against the dollar and the Euro.
The promise to return public finances to a surplus looks spurious, with the definition of what a surplus looks like – stretching the credibility of those who measure our national solvency. If that is the big (macro) picture, it’s also the picture the small man sees if he peaks behind the curtain.
This is a budget of soft options with failure dressed as success , ISAs dressed as pensions and cuts dressed as benefits.
And what of pensions?
The only directly negative pension change is the reduction in the discount rate used to measure the solvency of our public sector pensions. By reducing the long term discount rate by 0.2%, the Chancellor will be able an estimated 2% pa as contributions from employers to public service pensions. This is a tax by any other name though the Chancellor seemed to see those businesses and Government departments bearing the pain as seeing this as the welcome downside for a low-inflationary environment. As Mercer politely put it “some may beg to differ”.
We have already seen an NHS Foundation Trust, try to rid itself of its obligations to the NHS pension scheme by offering a salary flex for pensions, subject to it winning the outcome of the current enquiry into this practice, this increased burden on employers is likely to be the start of a wider trend.
The cancer within?
I hardly read any comment on LISA (the Lifetime allowance), that didn’t welcome it. In practice it is as welcome to the pensions industry as a fart in a lift. Michael Johnson, who does more than anyone to champion LISA is quite explicit- writing yesterday on LinkedIn
The Chancellor has announced a Lifetime ISA, from April 2017. It pretty much follows the structure outlined in a CPS paper from last October.
Next step is to introduce the Workplace ISA, to be housed within the Lifetime ISA. In time, all other ISAs will disappear leaving everyone with a single savings vehicle to serve from cradle to grave.
At the moment, LISA will be a self-select option which will compete for the affections of the under 40s against a contribution to auto-enrolment. It’s currently competing with personal and stakeholder pensions (which are looking increasingly tired).
The Treasury’s documents on LISA include a factsheet which is a rather better sales job than anything I’ve seen emanating from pension providers of late! (I very much doubt it would be approved by the FCA under financial promotion rules!).
The more detailed technical explanation includes this useful illustration of how things work.
It’s so simple, you put in £4000pa, buy a house and live happily ever after!
The reality is that people trust ISAs and don’t trust pensions and until somebody decides to make LISA as complicated as a personal pension, it will stay that way.
I wouldn’t call LISA “the cancer within”, I’d call this the start of the radical overhaul of the pension system promised in Budget15 and conspicuously pulled by the Treasury a couple of weekends ago.
The cancer within is not change, it is the refusal to accept that change is needed. So long as the pension industry tolerates the mockery of a tax system that we will operate from next month, the less likely it is to win the long-term argument.
I see the failure to get radical reform in pensions as a failure of nerve from Cameron and Osborne but also a failure of the pension industry to put its own house in order.
This morning I am off to talk about the budget at the Payroll World Payroll Conference and am very proud to be among those nominated tonight within the payroll top 50. I have published my presentation of the full impact of the budget on pensions on slideshare.
Here it is