Brexit could lead to more rather than less pensions regulation, while radical revisions to tax relief might be needed to keep low earners enrolled in the pensions system, according to a panel of policy experts.
The effect the UK population’s vote to leave the EU will have on pensions is still unclear. The broad consensus has been that eurosceptic Conservative politicians would push for greater deregulation of the UK after Brexit in a bid to keep the economy internationally competitive.
But at the Trades Union Congress Pensions Conference, held in London this week, Labour peer Baroness Drake suggested that instead of loosening UK regulation, the time might have come to empower bodies such as the Pensions Regulator and the Financial Conduct Authority to make trustees and providers increase consumer safeguards in relation to pension freedoms.
There may be a desire of any government to push more to TPR, to push more to the FCA
Iain Anderson, Cicero Group
“You can see emerging inefficiencies and really bad decisions happening. Products in the market aren’t fit for purpose and people are being overcharged,” she said.
“People are struggling to get the framework formed that improves the position of people who now carry personal responsibility under DC. And yet, post-Brexit, one can see the pressure for deregulation of consumer protections,” she added.
The FCA and the Pensions Regulator are currently working together on a new pensions regulatory strategy, which the FCA said will outline how they plan to work together to tackle the key risks facing pensions over the next five to 10 years.
Iain Anderson, executive chairman of communication company Cicero Group, gave credence to Baroness Drake’s proposal. “There may be a desire of any government to push more to TPR, to push more to the FCA,” he said.
Anderson claimed that the FCA wants to examine whether the consumer “is getting a good deal or not” over freedom and choice.
Director at thinktank Resolution Foundation, Torsten Bell, who previously advised former Labour party leader Ed Miliband on policy, claimed that freedom and choice is not a popular policy with the Conservative party today, “because it’s a George Osborne policy”.
He added: “It wouldn’t take much in terms of a lot of coverage of early mis-selling, or just suboptimal outcomes, to switch that from current agnostic, ‘We don’t talk about it, but we don’t scrap it’ to, ‘Blame George, have the regulator crack down’.”
Not everyone agreed, however. Baroness Drake said the chances of reversing the freedoms were “nil”.
Revise tax relief to help lower earners
Critics of Brexit and the government have lamented the lack of parliamentary time available since the 2016 EU referendum. Anderson observed that Brexit “crowds everything else out” from a legislative perspective.
Auto-enrolment has been in place since 2012, and has seen 9m UK employees enrolled in a workplace pension. It is widely regarded as a policy success, and the government will be keen not to allow Brexit to harm its development.
Baroness Drake said that Brexit “won't derail automatic enrolment, but [could] possibly impact incremental improvements to this policy.”
The preservation of low earners in auto-enrolment will be key to its success. From April this year, employees will have to raise their minimum contribution towards their scheme to 3 per cent from 1 per cent.
From April 2019, this will rise again to 5 per cent. Should Brexit contribute to downward pressure on wages, opt-out rates among lower earners could go up.
Bell said that looking at opt-outs “is the most important thing, from a generational outcomes perspective”.
He cautioned against overestimating the role of inertia in retaining savers within auto-enrolment at higher contribution rates, and called for a debate on pensions tax relief.
It is time to introduce a flat rate of tax relief
Darren Philp, director of policy and market engagement at mastertrust The People’s Pension, calls for the introduction of a flat rate of tax relief.
“If we need to, at reasonably swift notice, switch that tax relief system around into a more bottom-heavy – and I would say young people-heavy – incentive to keep people in the system early, then that would be a bloody sensible thing to be doing,” Bell said.
Tax relief is given on the marginal rate of tax, but some have previously called for introducing a flat rate. Baroness Drake said: “There’s a compelling argument to say it should be flat-rated.”
