What could a Conservative government mean for pensions?

In addition, we now have millions of individuals enrolled in a pension scheme for the first time, a flat-rate state pension from 2016, and a pensions taxation system so complex that even experts struggle to follow it. 

It was Conservative chancellor Norman Lamont who first reduced dividend tax relief in 1996

These changes have been overseen by a Conservative-led coalition government. However, the 2014 Budget aside, much of what has changed reflects policy formulated by the previous Labour government or initiatives generated by the Liberal Democrat pensions minister Steve Webb. 

So the past five years are not necessarily a good guide to what we might expect in the event that David Cameron’s Conservative party forms the next government. It could be more instructive to look back at what previous Conservative administrations did.

Pension taxation

During Margaret Thatcher’s premiership, we saw the introduction of legislation to tax “excessive” surpluses in pension funds. This led companies to improve benefits while taking contribution holidays.

Her government also introduced the earnings cap in 1989, which disenfranchised senior executives by restricting the amount of pension that could be provided on a tax-effective basis.

And it was Conservative chancellor Norman Lamont who first reduced dividend tax relief in 1996, paving the way for Gordon Brown to abolish it altogether in his first Budget. 

One area that has come under close scrutiny in this parliament is the level of tax relief granted on pension contributions and the disproportionate amount of such relief that is seen to benefit the higher paid.

All parties have signalled their intention to review pensions taxation. 

The Conservatives have also indicated their desire to merge national insurance and income tax. Such a change could, if handled well, deliver genuine simplification to a system that is no longer fit for purpose.

Reform of the pensions taxation system is long overdue, and if there was one positive legacy that a Conservative government could leave the pensions industry it would be a genuinely simple tax regime.

Shrinking the public sector

Previous Tory governments have also sought to reduce the size of the public sector – most notably through privatisation – and have signalled their desire to see the level of public sector pensions reduced.   

They have also legislated to discourage collective pension provision. In particular, Thatcher’s government introduced personal pensions and gave people the right to opt out of their company pension schemes. 

A future Conservative government is unlikely to embrace Steve Webb’s concept of defined ambition pension schemes

Other Conservative governments have introduced legislation that made pensions significantly more expensive to provide, and this was a significant factor in the subsequent demise of good final salary schemes.

Given its past distrust of the public sector and of collective pension provision, a future Conservative government is unlikely to embrace Steve Webb’s concept of defined ambition pension schemes.

Such a government is further unlikely to introduce higher compulsory pension contributions – the most we might see would be a policy of encouraging greater levels of pension savings.

I therefore expect a Conservative government would follow a pensions policy that includes:

• further restrictions on higher-rate tax relief for pension contributions;

• a continued focus on the level of public sector pensions;

• even less encouragement for collective provision as opposed to individual provision.

Such policies would likely lead to:

• clashes with public sector trade unions, intensifying the inevitable tension over further cuts planned in the size of the public sector;

• an accelerated rate of closure of the few remaining defined benefit pension schemes;

• little chance of Webb’s DA project gaining traction.

None of that sounds particularly encouraging. However, George Osborne has shown, with his bold 2014 Budget and subsequent reform of death taxes on pension savings, that he has the appetite to make meaningful changes.  

If he is still chancellor after May 7, I urge him to tackle the pensions tax system before it is too late. 

Bob Scott is a senior partner at LCP