or maybe not

This is what Lord Blunkett wrote and the Times published yesterday

Sir, The widespread reporting of a possible extension of employers’ national insurance in next week’s budget is very worrying (news, Oct 23 & 24).

It is one thing to increase the rate of national insurance, and quite another to levy this on employer pension contributions. As the former work and pensions secretary who signed off, with Tony Blair and Gordon Brown, pensions auto-enrolment — which recognised the genuine crisis, for generations to come, in maintaining living standards in retirement — I would advise strongly against this.

We need more employers contributing more than the basic 3 per cent and, with it, the corollary of savings and investment, not less. I sincerely hope the rumours are well wide of the mark.

Lord Blunkett
House of Lords

For many of the general public, pensions is just another deduction on the payslip, justified by being matched by a contribution from the Government and a contribution from the employer.

The argument for taxing the bit the employer puts in is that (1) it taxes “the broadest shoulders” – employers and (2) it raises a lot of money.

But it is a tax on people’s futures and it taxes the youngest hardest.

An office for value for money

I notice talk from the Chancellor of an office for Value for Money.

It strikes me that savers are – by and large – getting value for money on their pensions and that the Government incentive to save for retirement , is being invested well. It could be invested better and the Government is addressing this by asking DC providers to diversify our investments into more economically productive areas. This quid per quo, as described in Rachel Reeves 2018 paper (see yesterday’s blog) is acceptable.

What is not acceptable to me is allowing the fruits of the saving and investment to be used as a tax-shelter for the wealthy.

If the impact of the budget is to reduce the use of retirement pathways to mitigate income, inheritance and capital gains tax, then we are simply transferring public money (everybody’s money) to the private purses of the wealthy.

How can that possibly be considered value for money for those who do not pay inheritance tax or have pension pots worth more than £400,000.

Adequacy of savings or pensions?

My understanding of the two stage pension review is that it is tackling the value the Government is getting from saving first and the adequacy of those savings second.

The “adequacy of saving” cannot be measured by the pot but by what the pot buys. As we like to say of pensions, liabilities should drive investment not the other way round.

The needs of most people in retirement are not for a big fat pot of money but for a consistent income that pays the bills, from holiday to healthcare from day one to the day of death.

We have to look at the auto-enrolment savings system and the incentives that support it as a means to an end, not an end in itself. Right now, AE saving is little more than a sidecar to the state pension and (for the lucky ones) DB pensions.

We have to choose either to upgrade AE from a savings sidecar to a pension system or to relegate it to another savings choice alongside ISAs.

What Rachel Reeves chooses to do in the budget will send a signal to employers about the Government’s commitment to democratise pensions. If it starts to undermine the fiscal incentives to save, to protect the privileges of wealth, employers will get the message.