Ian Neale discusses the challenges facing the latest Pensions Minister, Guy Opperman.
The latest MP to move into the hot seat of Pensions Minister, Guy Opperman, is commencing a steep learning curve – like almost all his twelve predecessors since the post was created in 1998.
If we except Steve Webb, who served for five years, the average tenure of pensions ministers has been just fifteen months. Like Mr Opperman, most have had no background in pensions and little time to get to grips with their brief.
Mr Opperman's new boss on the other hand, Secretary of State for Work and Pensions David Gauke, has transferred from HM Treasury, where in seven years as a minister he must have had some exposure to pensions policy - particularly the controversial subject of tax relief.
Mr Gauke was a senior colleague of George Osborne when in July 2015 the Chancellor threw all the cards in the air with his Green Paper on pensions tax relief. Thankfully, the outcome of that exercise was 'no change for now' (although Mr Osborne clearly felt miffed at being told there were some difficulties in reversing the EET – exempt-exempt-taxed – principle). All we suffered was the distraction of LISA in the March 2016 Budget.
The Treasury's dream has not evaporated though. The fact that we have an apparently slightly more pragmatic Chancellor in Philip Hammond doesn't mean the departmental culture has changed.
The sheer size of the annual bill for pensions tax relief (£38.2 billion according to the latest official published figures, for 2015/16) is too tempting a figure to be ignored by a government desperate to reduce the deficit.
Mind you, it's worth looking more closely at that figure. The lion's share of it, £22.8 billion, went on contributions from employers – and a good chunk of that was on deficit repair funding. Only £7.6 billion went to individual member contributions.
Bear in mind too that the Treasury received £13.4 billion of tax from pension payments in 2015/16, underlining the fact that pensions tax relief is in reality largely pension tax deferred.
I mention that because at an ABI conference on 4 July, in one of his first public speeches as Secretary of State, Mr Gauke acknowledged the idea of radically altering pension tax relief being "somewhat daunting" and that he "wouldn't expect to see any fundamental changes in the near future." Coming from a minister whose thinking about pensions was moulded in the Treasury, those words should carry some credibility.
Mr Gauke went on to suggest that there was no consensus on how pensions tax relief should be reformed: I would counter that there is a pretty strong consensus that it does not need radical reform.
A government serious about reducing the net figure of £24.8 billion without destroying the auto-enrolment programme and triggering a huge increase in future claims on state benefits might do better to focus on ways of reducing the burgeoning bill for defined benefit deficit funding.
But back to Mr Gauke, who while recognising the difficulty of "fundamental" reform, made no promises that the government would leave pensions alone, not even while brexitation is under way. As the minister ultimately responsible for ensuring auto-enrolment is not derailed, he also acknowledged the savings needs of the 4.8m self-employed and the rise of the gig economy.
Naturally, pension contributions are increasing.Pensions tax relief will never be on the back-burner at the Treasury.
The fear is that while thwarted in their bid to secure a massive chunk of additional income tax from taxable pension contributions, they will resume their salami-slicing strategy with further reductions to the annual and/or lifetime allowances.
Deterrents to pension saving are the last thing we need. We are on course already for a two-tier pensions society: defined benefit pension for public sector workers and money purchase pots for the rest – which is most of us.
So let's focus for a minute on the lifetime allowance, now down to £1m and widely regarded as a tax on successful investment. Any benefits crystallised in excess of £1m attract a tax charge.
With a £1m pot, a 65-year-old might buy an index-linked joint-life annuity worth around £33,000 pa. (Yes, I know most people these days wouldn't go down that route, but stay with me; I want to compare their position with a defined benefit scheme member.)
From a defined benefit scheme, a similar pension of up to £50,000 can be had without incurring a tax charge, because of the 20: 1 valuation factor. So wouldn't it be fairer to adjust that factor to say 30:1?
Or would that be too daunting?
Written by Ian Neale,Director, Aries Insight
