I listened to a podcast yesterday that had four men talking about the budget, One of them said that it was a “boring budget for pensions”. I thought about how little we know.
We know about technicalities, the stuff of yesterday’s blog about administering the forthcoming rules on IHT
But we don’t think much about how pensions touch the people we serve. On Friday afternoon I sat on a call with a man who was having to deal with the consequences of his company’s wage bill going up £25m pa from April, the wage and pensions bill is £1bn pa, that’s a 2.5% rise but it’s £25m a year that won’t be being spent on his employee’s retirement.
I was mailing a friend yesterday afternoon, who’s son in law runs a bakery with 14 low paid staff. The price of his bread can’t go up faster than Tesco’s, Tesco may be able to absorb a 2.5% rise in labour costs, he can’t.
And as I woke up this morning, it came to me that 3% of band earnings is about the same – for an employer as 2.5% of total earnings.
And that the total cost of auto-enrolment for that bakery, is equivalent to the NI increase its payroll will suffer in April.
It took 12 years between announcement and full implementation of auto-enrolment. Many small employers, like the baker had five years of warning. Even Tesco had years to prepare. But the financial shock of the 2.5% payroll tax that is coming the way of both these companies, will arrive in just over a quarter.
And herein the disconnect between “boring pensions” and the real world. For the podcasters, nothing really happened, but for people who run businesses which employ low paid people, this budget is gong to be as expensive as their entire auto-enrolled workplace pension program.
Somebody else on the podcast moaned that we could say goodbye to the auto-enrolment reforms , consulted on in 2017, anytime within this parliament. I agree. Businesses cannot afford them and Government cannot afford to forego the tax and NI lost to pensions.
And if anyone is in any doubt why the second not the first half of the current pensions review is dealing with adequacy, it is because this Government knew from day one that there would be no headroom for further payroll taxes (which is what auto-enrolment is to most employers.
My friend who has a son for a baker refers to auto-enrolment as sidecar savings. He is right. At its current level and with its current ambition, it is no more than a means to provide a sidecar to the state pension for the majority of the 11m new savers since 2012. if you were in a DC pension before 2012 it was because you had been in a DB pension or because your company felt it had to offer a similar reward. Auto-enrolment has democratised workplace saving but it is not replacing the pension culture we lost when DB’s tap was turned off.
There are some, honest people, people such as John Ralfe, who believe that DB promises are dishonest. I prefer that level of brutality, because it is plain speaking. I prefer it to the Alice in Wonderland world of those who see workplace DC as a replacement for DB. John Ralfe knows it is no such thing, he sees DC as “honest”, it states our impecunity as it is – and our lack of ambition. But I do not agree with John Ralfe.
Do we really believe that there is sufficient political, corporate or personal will for a 12% pension contribution on all earnings as Australia has (or is about to have?).
Those, and they seem to include the entire PLSA, who do – need to think long and hard about the consequences of this budget. Pensions are hugely expensive to save for. The total savings from this budged – £40bn – amounts to half the accumulated “pot” saved by the USS pension scheme, it is only just more than the total amount saved into Nest since 2012. Pensions are big ticket items, USS gives people a pension on a big band of earnings that could be 2/3 of salary, Nest gives you a sidecar savings pot – the most recent figure for the size of such pots (Nest Insight ) was as at 31 March 2021: £1,815 (all members) £3,038 (active members). That is not the pension that is the pot, divide the pot by 20 to get the pension.
The way forward
We need to be realistic. Pensions adequacy for ordinary people on ordinary wages with ordinary “pension” contributions will only be achieved with the help of large extra contributions from employers and by significant payroll sacrifice by employers. The mechanism we have put in place to provide second pillar pensions will only provide a comfortable standard of living , if the house is paid for and not rented , if the state pension is paid in full and if people can turn the pot to a pension at a reasonable rate.
The budget was a hammer-blow for pensions not because of the closure of QNUPS and IHT loopholes, but because the Chancellor showed that the cupboard is bare for extra mandatory contributions to auto-enrolment. This may not be news to those who are on , or who listen to pension podcasts, but it is the fact of the matter.
We are coming to the end of 2024, the 2017 AE reforms were supposed to be implemented in the middle of this decade. They are unlikely to be implemented this decade if at all.
Our workplace pension savings system is no more than a sidecar to the state pension for most people, it’s taxed and tax free cash , not a pension at all.
If we want to address this , then we are going to have to find something at the back of the bare cupboard or we are going to need some serious economic growth over the next 5-10 years.
Within the next few days a new Chancellor will be speaking at the old Mansion House about how we can get that growth into the economy. We cannot go on with a pension system that sends its growth assets overseas and “invests” the majority of its funds in short term loans. We need to get back to investing long-term in the companies that pay our pensions.
The only way that company with a £25m extra pay bill can meet its pension and payroll costs is by growing and growing in a sustainable way. It needs investment and will get it from the private (not the public markets). The bakery needs to grow too, it need long-term capital to do so.
We cannot sit on podcasts and ignore these huge matters . The budget wasn’t pension-boring – it was pension-appalling. It exposed how far we are from pension adequacy . It should be a wake up call for all of us to man the pumps.
