Johnson

Torsten Bell – thinker

It’s the Treasury what done it!

The past nine years (since Steve Webb left office as the pension minister) have seen very little get done in pensions. Ros Altmann was ineffective from the House of Lords, Guy Opperman got the 2021 pension schemes act over the line – but little of it done, Laura Trott was inspirational but used the DWP as a trampoline to the Treasury, Paul Maynard has been left to sweep up.

What changes in pensions , has changed because of the Treasury and what has changed most in private pensions has been because of the monetary policy of QE and then QT which has wrecked DB funding and Pension Freedoms which have wrecked Money Purchase and CDC.

What we have today is a great number of savers , saving too little to retire on and a DB pension system that has been gutted by leveraged LDI and suffocated by various versions of a DB funding code. Of all this – only the Pension Regulator’s codes and guidance have had much impact (mostly but not totally negative). Most of the change in private pensions has come from the activity of the Treasury.

Which is why the IFS is so important

Whether Government likes it or not, Paul Johnson and the IFS are considerably more authoritative than the manifestos of political parties. I would be extremely surprised if the IFS are not being consulted by the Labour party before it publishes its manifesto this week and the IFS has been busy pre-publishing its manifestos for change. Subscribe to its newsletter and you get this

This week we released analysis on everything from the state of education to pension policies. We also responded to key announcements on council tax, mortgage guarantees, child benefit withdrawal and the pensions lifetime allowance.

You can find out more about their  latest analysis  and keep up with all of their election analysis at ifs.org.uk/election.

It is the IFS’ analysis of the pensions lifetime allowance that concerns this blog because it is no such thing but a five point plan to reverse the negative impact of the pension freedoms and return pensions to the centre of the discussion.

Just to be clear about these five points

1. The IFS want a Lifetime Allowance but only for those with private pensions valued at £2.7m or more (that’s about £14o,000 pa in private pensions – more than £150k if you add in the state pension.
2. They want the way the LTA calculated to change – firstly by using better DB conversion factors,
3. But ultimately by moving to a lifetime contribution calculation (though good luck with that!)
4. They want to dial down the maximum that can be taken as tax free cash to £100,000 from £263,000
5. They want to scrap inheritance tax exemptions so that pension wealth is treated the same amount as any other wealth

The LTA reforms (1-3) are neither here nor there to most people, they are more political than actual and will only concern the wealthy and their retinue of tax, legal and investment advisers.

But the reforms limiting tax free cash and especially inheritance tax could have an equivalent impact to the pension freedoms, indeed they could reverse the pension freedoms for the mass of people who may have wanted freedom but have shown no aptitude to use it. That is unfair on people, why should they have converted themselves to being their own actuaries, investment , tax and legal advisers, why should they be their own trustees?

What reforms on TFC and IHT do is restate the pension as a pension – a wage for life that has no inheritable advantage nor especial tax privilege. Pensions are once again EET (exempt at the point of contribution, on investment growth and taxed at the point of payment).

Pensions become worth spending again

The tax free cash – currently set at 25% of the old LTA would wither to nugatory amounts like MIRAS did. People – were (5) to be implemented, would no longer be incentivised to bequeath their pension pots to their estate, the only thing worth doing with the pension would be to spend it.

And this of course brings us back to what people say they want their pension to do with them, which is to replace the income they enjoyed from work so they can be paid like they were at work, while enjoying a nice long holiday.

The idea of “retirement as the longest holiday of your life” was common in my youth, when people used to think of being in a company pension as a reason to go to work.

It lingers on with “save enough so you can stop work”, but that slogan suggests a certainty that is belied by the reality. “How much do I need to stop work?” is rather different from “I’m retiring on two thirds of final salary”. In truth we have only the annuity as a measurement of how much our savings are really worth as a lifetime income and people still struggle with the concept of “money purchase” when the purchase is an insurance policy that rather underpays against expectation.

A focus on pensions can excite innovation

Nevertheless, the annuity is a starting point and a benchmark against which other more innovative approaches can develop. If we have a pension system where the pension is the central feature of the benefit, then we should have more innovation in this space.

Right now, the best the pension industry can come up with , is an algorithm that nudges a later life annuity purchase and a diversified income fund to provide drawdown in the meantime.

The innovation is in collective approaches to helping people take a pension. CDC is one option, especially the variants of CDC which pay a non-guaranteed wage for life in return for some or all of the savings spot (known catchily as Decumulation only CDC).

Another innovation is to use the concept of the capital backed journey plan which is behind superfunds and co-sponsorship of DB plans , to offer DB pensions to those with DC pots.

Both ideas are good and both have yet to see the light of day. But I suspect they have a good deal better opportunity, if we see the return of the pension culture that would happen if the five point pension plan , put forward by the IFS, was adopted by a new Government.

I hope that future Labour politicians, including Torsten Bell – the future MP for Swansea West, will get to grips with the IFS proposals and give them the consideration they deserve.