Article What could the Labour Government’s Pension Review include?

Ahead of the Election, Labour set out their intention to ‘review the current state of the pensions and retirement savings landscape’ since reforms in the early 2000s. In this article, I’ll set out:  

• What we know so far
• Possible approaches to the review
• What could be in scope?
• Our view on key priorities
• What this means for you

What we know so far

The Labour manifesto gave little insight into pension policy plans other than committing to retain the state pension triple lock. However, it did make reference to an earlier document - ‘Financing Growth Labour’s Plan for Financial Services'. As you’ll see from this extract, the door is firmly open for what could be a very wide-ranging review with many implications for pensions and advisers.

Undertake an in-government pensions and retirement savings review:

Possible approaches to the review

So, how might Labour run this review? It’s very welcome to see the reference to working with industry and consumer groups and at Aegon we look forward to participating fully in that.

While pensions are some of the very longest savings commitments, over time, the rules and regulations surrounding them have become ever more complex. The review presents a great opportunity to think deeply and arrive at a joined up, sequenced reform agenda prioritising what will deliver the greatest benefits to savers.

Some of the most successful pension reforms since the turn of the millennium came from the Independent ‘Turner Commission’, set up by a previous Labour Government, whose recommendations included automatic enrolment. It would be very welcome if the new government used this model and set up a new Pensions and Long Term Savings Commission.

What could be in scope?

Labour have inherited a vast number of major initiatives from the outgoing Conservative Government, many of which interlink. These include:

• The 2017 auto-enrolment reforms
• The DWP / Pensions Regulator / FCA Value for Money framework
• Extending pension freedoms to members of trust-based schemes
• Consolidating small, deferred pension pots
• Pot for life / lifetime provider model
• Extending Collective Defined Contribution schemes
• Pension dashboards
• The HM Treasury / FCA Advice Guidance Boundary Review including ‘targeted support’

There’s also the pressing task of sorting remaining issues with the Lifetime Allowance abolition.

For each, Labour will now need to decide whether to continue, change or cancel. And that will very much depend on what else Labour may have plans for. The Review is ideally positioned to consider this, providing an opportunity to step back and join up.

The Pension review aims

Labour’s promised Pension review has three aim’s which I’ll look at in turn.

1.       Delivering sustainable retirement incomes

A key pre-cursor to delivering a sustainable retirement income is to have accumulated enough by retirement. Then there’s the question of how best to draw an income from this.

The accumulation phase - adequacy

The review references the welcome introduction of auto-enrolment. Most would agree that the current minimum contribution of 8% of band earnings is unlikely to be adequate to provide a comfortable retirement. Labour supported the recommendations within the 2017 review of auto-enrolment - removing the £6,240 offset and lowering the minimum age from 22 to 18.¹ I hope Labour now accelerate the timeline for introducing these changes, rather than the ‘mid to late 2020s’ recently promised by the Conservatives.

There’s also a pressing need to explore the next enhancements such as increasing the minimum contributions perhaps to 12%, split equally between employers and employees, with special provisions for lower earners to protect them from over-saving.

The self-employed and those gig economy workers excluded from auto-enrolment are  particularly at risk from not saving enough or having a sustainable income in retirement. We need fresh impetus to address this. Savings adequacy amongst women and certain ethnic groups also need considered specifically.

Drawing an income

Labour might look at the risks income drawdown presents around sustainable retirement incomes. Prior to the introduction of flexi-access drawdown in 2015 (the ‘pension freedoms’), individuals could only encash their full pot if they had an annual minimum secure income - £20,000 up until 2014, then reduced to £12,000.

A focus on sustainable retirement income could reopen the debate around a minimum secure income at a level somewhere above the full new state pension, but this could prove unpopular particularly for those with modest pensions.  

Another possibility is Labour might revisit Conservative plans to offer members of trust-based schemes greater flexibility but requiring trustees to develop a ‘default decumulation strategy’ for members not willing or able to make their own decisions will take longer.

Unlike ‘standard’ DC schemes, Collective Defined Contribution (CDC) schemes pay out an income for life, with no risk of running out of money. However, there’s no guarantee the income won’t go down year on year as it depends on overall scheme performance. Some claim CDC schemes could deliver higher returns by investing longer for growth, potentially in illiquids. So these could also be relevant to aims two and three.

The transition from accumulation to taking an income

There are two other developments underway which could really help individuals make an effective transition from accumulation to decumulation.

Pension dashboards will allow individuals to see all of their pensions in one place, online, securely. Hopefully they’ll then be better placed to make retirement decisions across all pensions together, rather than one by one. This might discourage the prevalence of total encashment of small pension funds, improving retirement income sustainability.

But for many, even with dashboards, pension decisions will still be daunting. So I’m pleased Labour’s Plan for Financial Services confirmed their support for the three key proposals in the Advice Guidance Boundary Review. I’m particularly keen to see ‘targeted support’ go live, which could play a big role in reducing the support gap at retirement.

2.       Ensure savers are getting the best possible returns

I look forward to seeing more detail around this aim. I’d expect ‘best possible returns’ to be defined as commensurate with an appropriate degree of risk.

I expect Labour will support the Value for Money (VFM) framework which the DWP under Conservative rule has been advancing with the Pensions Regulator and FCA. One key aim is to move the focus away from lowest charges to a combined focus on charges, investment performance and customer service. As this is still under development, Labour may wish to influence the finer detail.

The VFM framework is also intended to drive scheme consolidation, with underperforming schemes being required to wind up and consolidate into larger, better value schemes, delivering improved member outcomes. Labour have made clear they support this, and the VFM framework is a clear enabler for this.

The automatic consolidation of small deferred DC pots (initially under £1000) could boost member returns if it avoids individuals paying more in charges, but the impact is likely to be very modest. To me, it’s a candidate for being put on hold until more impactful changes are in place. Indeed, Labour may favour a completely different solution such as ‘pot follows member’, or even allowing consolidation of small pots on pension dashboards in future.

Another Conservative initiative at an even earlier stage is the radical pot for life or lifetime provider model. This is controversial, not least because many - including Aegon – fear it could damage the success of auto-enrolment by marginalising the role of employers. With Labour championing the success of auto-enrolment, I hope this is a candidate for being dropped.

3.       Tackling barriers to pension schemes investing more in UK productive assets

The previous government was focussed on pension schemes investing more in productive assets and in the UK and Labour appears just as keen here. Of course, there are two separate decisions here for trustees and those running pension schemes. First, will investing more in the UK likely improve member outcomes? Investing in less liquid productive assets is a very different decision. The overlap of ‘UK productive assets’ looks relatively small and specialist. We must remember that trustees need to act in the best interest of scheme beneficiaries – that’s their fiduciary duty.

Might the pensions tax regime be in scope?

Pre-Election, there was much speculation around Labour’s possible approach to the pensions tax regime generally and the Lifetime Allowance specifically. While reintroducing the latter wasn’t in the manifesto, that doesn’t necessarily mean it’s been dropped entirely.

Similarly, while not mentioned in the manifesto, the broader system of pensions tax relief could be part of the review. Tax relief boosts gross contributions and hence how fast pension pots grow. Reducing tax relief would reduce affected individuals’ retirement pots and the sustainability of their retirement income. But Labour could view flat rate tax relief for all, between basic and higher rates, as a more equitable spreading of tax relief, boosting outcomes for basic rate and non-taxpayers but reducing it for everyone else.

Flat rate relief is easier said than done, particularly for defined benefit schemes with a solution likely to involve a ‘benefit in kind’ style tax charge on employer pension contributions for higher rate taxpayers. Let’s remember that tax bills linked to pensions led to higher paid professionals retiring from the NHS!

Another area Labour might wish to explore is the various elements of tax treatment of pension pots on death, pre and post age 75. 

Our view on key priorities

At Aegon, we believe the top priorities for the incoming Labour Government should be as follows:

1. The planned ‘2017’ enhancements to auto-enrolment
2. Introduction of the Advice Guidance Boundary Review targeted support
3. A commitment to connection dates so pension dashboards can go live by 2026
4. Finalising the Value for Money framework, including as a building block for future initiatives

Last but not least, we mustn’t forget the hugely pressing need for HMRC to finalise the legislative changes needed to abolish the Lifetime Allowance. You can read more about the abolition of the lifetime allowance in our technical zone.

What this means for you

The world of pensions never stays still for long. Labour’s pensions review means we can ‘look forward’ to further change. It remains to be seen which of the previous government’s proposals will be continued, changed or cancelled. It’s also difficult to predict just how radical – or wide-ranging - the Labour Government’s pension agenda for the next 5 years will be.

But once again, it’s in times of change that your clients need your advice more than ever. We’re ready to help you keep up to speed with developments.

Get ready – we have an interesting time ahead.