As speculation mounts, savers and pension funds nervously await the 26 November Budget with the mantra, “no news is good news”.
There’s no doubt that the chancellor has some difficult decisions to make. With business and consumer confidence low, productivity downgraded, inflationary pressures, stagnant growth and unemployment at its highest point since the pandemic, it was always going to be a tricky Budget.
It’s also clear that the government thinks pensions should benefit more than just savers and scheme beneficiaries, and that the sector has a role in supporting the growth of the UK economy. To that end, this government has already announced a raft of pensions reforms that are impacting pension schemes and their members, including the Pension Schemes Bill and the Mansion House Accord.
“Should the chancellor come to the Despatch Box with further reforms to pensions, she risks further damaging confidence in the system.”
Lou Davey, IGG
But will the Budget add even more complexity to an industry already grappling with change?
More changes could damage confidence
Following years of pensions policy debate and reform, the Pension Schemes Bill continues its passage through parliament.
From operational complexities, through to maximising surpluses, scheme consolidation, value for money frameworks and changing our thinking on guided retirement and the investment balance of UK pension schemes, the UK pensions industry has had to adapt to a lot of change in a few short years.
Should the chancellor come to the Despatch Box with further reforms to pensions, she risks further damaging confidence in the system.
Having announced the much lauded second Pension Commission, led by Baroness Jeannie Drake, Rachel Reeves must resist any temptation to pre-empt its work – lest she undermine it and defeat its purpose.
However, I welcome the focus on pension adequacy and pensions minister Torsten Bell’s resolute commitment to making more people interested in their pension and planning for their futures, and I hope any Budget-related pensions decisions are viewed through this lens.
As the industry prepares for the launch of pensions dashboards, soon people will – rightly – have more awareness and understanding of just how much they’ve saved in their pension pots. Transparency is a great thing; I passionately believe people should be more aware of the value of their pension and how much they need to save to reach their desired lifestyle in later life.
However, if some of the rumours are true, particularly those that limit tax-free pension contributions, this Budget could create a maelstrom of confused savers, risking the attractiveness of making pension contributions. This would be self-defeating and would only further exacerbate the issue.
While the long-term consequences for savers who fail to contribute enough to their pension pots is obvious, I worry the government’s focus on short-term revenue-raising measures risks compounding this problem.
With concerns regarding the long-term viability of the state pension, more onus will be placed on private pensions. Any measures that make contributing to a pension less attractive will worsen the problem in years to come, with the growing risk that more and more people won’t have adequate incomes in retirement.
Grow contributions to help grow the economy
The government must also not forget about its aspirations for pensions to help fix and grow the economy. In addition to the Mansion House reforms, the government’s 10-year infrastructure strategy, published early this year, should have been a shot in the arm: promoting and encouraging UK and overseas pension funds to invest in a pipeline of UK productive assets.
“Though there are arguments that pension schemes have a moral obligation and duty to improve the economy, trustees’ fiduciary obligations remain the same.”
Lou Davey, IGG
If the government targets pension savings in its Budget and savers contribute less to their pots, then the overall capital in pension funds for these investments also shrinks.
While I don’t believe trustees of pension schemes have obligations to the UK economy on par with duties to their beneficiaries, I absolutely recognise the mutual benefit where schemes are able to secure an attractive return on investment in UK productive assets.
This is why the government must not use pension schemes and the investment potential as a political tool in this year’s Budget. Though there are arguments that pension schemes have a moral obligation and duty to improve the economy, trustees’ fiduciary obligations remain the same.
Nearly 18 months ago, this government was elected on a manifesto of change powered by growth. When it comes to pensions policy, the chancellor needs to focus on growth and delivering change, while giving the sector and savers certainty – and space – to realise the benefits she believes pension funds can and should make for the UK economy.
Lou Davey is head of policy and external affairs at Independent Governance Group.
