Source; Office For Budget Responsibility – figures not adjusted for inflation.
In a week’s time we will have a spring statement. Any thoughts of largesse from the Chancellor will have suffered from downgrades in our economies economic growth and these are founded by our failure to grow month on month. Fiscal rules are important to this Government, very different to what we see on the other side of the pond. As a Chancellor, she must factor in increases on spending on defence and the impact of overseas tariffs. We are not going to see largesse and we are not going to see “adequacy” high up the Chancellor’s priority list – when it comes to private pensions.
Torsten Bell made it clear that the pensions industry cannot expect more mandation resulting in bigger contributions. Instead, Bell told the PLSA that it had better do better with the inflows of cash it has enjoyed since 2012 and the start of auto-enrolled workplace pensions. Here I think we see a new approach to pensions, one that marks Labour pension policy as different from what came before it , for 14 years, 8 of which were distinctly blue (6 touched with Liberality).
What is new from Labour is not its Mansion House expectation of investment into UK growth stocks, but a view of the private pension system as aligned to the public sector . LGPS and the remaining DB schemes which are invested and could invest more. What this alignment is , is the collective payment of pensions – rather than the Tory mantra of “pension freedoms”. We could, by the end of this parliament, be thinking of DC pensions as providing either defined pensions (DB), undefined but collective pensions (CDC) or annuities – if that is the way that DC pensions want to define their “default decumulation offering”.
In short we will have moved from freedom as the default to lifetime income as the default with people choosing to have something else (inheritance planning, flexible drawdown or cash in the bank) having the right to do.
I listen to the Pension Minister and the civil servants who advise him and I get a different answer to the question we put to Opperman, Trott and even Webb. They were living in an era where gaining freedom from annuities (as we were forced into) was politically advantageous if your colours were blue. No Labour politicians could disagree, annuities were not good news for those on low or middle incomes, only the wealthy could enjoy freedom (on a bizarre wealth means test).
But something was wrong, the first step in aligning DC pension savings to the rest of the pension system (most importantly to Labour- the State Pension) was the end of inheritance tax exemptions for “pension” wealth. If , from 2027, you have to spend your wealth on future income , if it is not to count as part of your inheritance when you die.
It is the first step on a journey back to pensions and it is most definitely a blow to wealth managers who had a lot of influence in Conservative times. £3.4bn pa will flow back into the Exchequer, hardly a major influx relative to the shock its given to the “pension blues”- those for whom pension freedoms were offered and for whom pensions are an irrelevence.
The second step was made in the Kings Speech when there was an announcement that DC savings schemes benefiting from the mandation of auto-enrolment for employers , would need to default savings into some kind of retirement income arrangement (known horribly as “decumulation”).
The argument now being had is who owns these auto-enrolment linked DC savings schemes. Is it the insurers or is it the occupational pension industry? If it is the insurance mentality which seems to have dominated not just the insurance owned master trusts but most of the others too. Only TPT is making a real effort to offer pensions as occupational pensions used to do. Their attempts to create a CDC pension culture around it are counter Conservative culture but (dare I say it) in line with a Labour culture that appears to be encouraging a return to pensions.
Pensions offer economic advantages to the economy in a way that annuities don’t. Both as growth investors and as purchasers of gilts, funded pensions are helpful in a way that annuities aren’t. Labour are sounding like their former minister Frank Field who told us “pensions are Britain’s economic miracle”. That was prior to the demise of the growth mentality that saw British pensions powering our stock exchange and our economic growth.
This is certainly evident in some of the encouragement being given to existing defined benefit pension funds (including new superfunds) and to a number of employee groups who are quietly saying they want to convert from DC without a pension to one that gives their staff either a defined or undefined pension. I do not hear a call for the return of an annuity culture from such employers.
We have another factor in the minds of employers and of Government. This statement is clipped from the announcement on the BBC website of changes in health based benefits with the emphasis of getting those who are ill back into work. I am aware of the “stay away from work” culture that exists for those who are sick, I have been told I am foolish for working in my current condition, I know that I would deteriorate if I didn’t work and my sympathy is with this statement from Starmer.
The rising cost of sickness and disability benefits is “devastating” for the public finances, Prime Minister Sir Keir Starmer said, after his government announced a major overhaul of the welfare system.
Sweeping changes were unveiled on Tuesday, which ministers say are aimed at saving £5bn a year by 2030 and encouraging people to work, while protecting those who cannot.
Sir Keir said the current system had “wreaked a terrible human cost“, with people who wanted to return to work unable to access the support they needed.
This attitude from Labour is in line with the attitude that is emerging towards retirement. We are seeing a Government which is taking pensions for those with small amounts of cash to buy them, a matter of default.
It seems likely to me that the Torsten Bell time as Pensions Minister will see an emphasis on people working longer, targeting pensions not wealth and the pensions industry regaining an interest in paying pensions (not annuities nor abandoning their clients to freedom).
Pensions is a part of the welfare system, we need to realign the way we manage it as we need to re manage the assessment and payment of other welfare benefits. Labour are politically different from Conservatives. This is pension news for the blues.