Speculating on budgetary changes is a mugs' game and I've been as guilty as any of trying to second guess not only the direction but the destination of travel - following the announcements last year of a radical overhaul of pensions tax relief. This weekend (and I suspect for weekends to come) the FT has run a story preparing the population for what is to come.
Claer Barrett's article picks up on columnist Jo Cumbo's comments throughout the month, that whether the Chancellor moves to a flat-rate system or goes the whole hog to TEE, the higher earner is unlikely to see pensions as the "wealth haven" it currently is, after march 16th.
Though they have different thoughts on how low we should go, the thought leadership that has led us here has largely been the responsibility of Michael Johnson and Ros Altmann, both of whom have campaigned to reverse the way pension taxation works so that it encourages those on lower earnings to save, rather than providing high earners with a tax shelter.
Arguments that without the support of the super-rich, pensions are dead in the water fall on death ears these days. Auto-enrolment is meaning that everyone gets a shot at pension saving, whether the bosses like it or not. Bosses have enough invested in old style DB or well funded workplace schemes for them to be politically appeased. The Government hopes it has the makings of a new tax-settlement.
The old settlement has broken
Paul Lewis made the point to me this weekend that- after decades defending higher rate tax relief as a sacred cow, the ABI appears to have sent it to the abattoir, arguing in a recent paper that a flat rate (set at around 33%) better suits the needs of the nation. Clearly they are part of the new settlement - or at least a consensus that could make the settlement possible. But I still don't see the numbers adding up.
The Pension Policy Institute reckon that moving the flat rate to 25% would save us around £6bn a year in taxation, but that is based on the current contribution model. The influx of savers enrolled so far, plus those joining over the next three years is already creating a whole new problem for Her Majesty's Revenue and Customs. When the estimated 11m new savers move from contributing 1% of band earnings to 5% in 2018 and 2019, then the problem gets a whole lot worse.
Theoretically, any gains from moving to a 33% rate would be wiped by new contributions which would actually cost the Government much more than under the current system (where the loss to the Exchequer would be limited to 20%).
To run auto-enrolment on a fiscally neutral basis, by the end of this Parliament, the Chancellor will need to find away to book even more savings than the £6bn pa that he'd get from a 25% tax break.
The elephant is now DB - especially for Government officers
That would mean a very different kind of tax return for those contributing large sums to pensions and probably a very large benefit in kind for those enjoying accrual in defined benefit schemes. I cannot see how Osborne can avoid not the cow - but the elephant. Defined Benefit Schemes have so far been ignored in the arguments about tax relief. I still hear arguments that they are going to get a "carve out" because they are an endangered species, because of the political sensitivities associated with Government Pensions.
But the political consensus on which any new tax settlement relies, depends on it being a holistic settlement that does not exclude a proportion of tax- payers getting priviledged status.
To ring-fence those enjoying DB benefits would be to create a pensions apartheid that would be immediately unacceptable to those outside the Laager. I suspect that the FT know this. The disruption that is coming our way from the March budget , is likely to focus on the fundamental issue raise by Claer Barrett. Pensions are currently the shelters for the rich and the reward for public service. These two special interest groups have had it very good for a very long time but both look extremely vulnerable.
Pensions austerity may be rather tougher for the rich than the poor. That would be a first!.
About Henry Tapper
I'm best known for helping small employers and business advisors with their problems with pensions. These are typically over choosing the right pension for auto-enrolment though through my work with First Actuarial, I get involved with big occupational schemes too.
I'm on this site as I see accountants as the missing link between the pensions industry and the business community - especially small businesses.
I've a Cambridge MA and 30 years in finance behind me, but I'm looking forward to the next ten to twenty years (my flexible "corridor to retirement") to help restore people's confidence in pensions.
Director- First Actuarial
Writer- www.HenryTapper.com and many magazines and papers,
Manager; Pension Play Pen linkedin group, Pension Auto-Enrolment Linked In Group
Choices Champion; Friends of Auto-enrolment