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Category — UK Economy and Economic Policy

Tata Steel – what happens to the British Steel Pension Scheme?

7 December 2016

Common sense prevails at British Steel – jobs secured

  • But not clear what will happen to British Steel’s 130,000 member pension scheme
  • New pension scheme seems generous compared to average UK schemes nowadays
  • But Tata says old British Steel scheme will be ‘de-risked’ and ‘de-linked’ – could mean going into the PPF or could mean standalone
  • Ongoing negotiations with the Pensions Regulator likely and no details yet available

 Saving jobs is so important for South Wales:  It is great news that the unions and Tata Steel have reached an agreement that could secure jobs and steel production at Port Talbot’s blast furnaces for years to come.  That is really important to the people of South Wales and it seems the unions have worked really hard to preserve the industry that is so important.  But this is all subject to consultation so it must still be ratified by the workforce.

Job security vs. pensions:  The job security and new investment in the business seems to have come, however, partly as a consequence of changes to the pension arrangements enjoyed by the 130,000 British Steel Pension scheme members.  By closing the scheme and looking to change future arrangements, Tata’s burden of ongoing pension contributions could be reduced.

Close DB scheme and start generous new DC scheme: The proposal is that the final salary-type pension scheme will close and all workers will be moved into a new pension arrangement.  This will be a Defined Contribution scheme, which means the employer no longer shoulders the risks involved in long-term pension provision.  The terms of the new scheme, negotiated hard by the unions, are relatively generous.  They will offer up to a maximum 10% employer contribution with 6% from employees.  The legal minimum is far lower (currently 1% each from employer and employees, rising to 3% from employer and 5% from employees by 2019).

But not clear what happens to existing British Steel Pension Scheme – still waiting for Consultation Response:  It is not clear, from today’s releases, what will be happening to the existing final salary pension scheme.  Will benefits be reduced by going into the Pension Protection Fund?  The Government consulted earlier this year on changing the law to force through significant cuts to the full benefits promised to current and past workers.  For Government to do this, for just one scheme, would have set a very dangerous precedent for all other private sector schemes.  We still have no confirmation of what will happen, even though it was rushed through as an emergency measure during the Referendum campaign last summer.  We still do not know when there will be an official response to this consultation.

Probably still negotiating with the Pensions Regulator – will scheme enter the PPF?:  The fact that there has been no announcement from the Government, and the wording of the statements today from Tata and the unions, suggest that no resolution for the British Steel scheme has yet been agreed.  The wording used is that the scheme will be ‘de-risked’ and ‘de-linked’.  This could mean that the scheme is heading for the Pension Protection Fund after all, but the trustees may also still be negotiating for a different outcome.

RAA would allow business to separate from pension scheme:  The Regulator does have the power to permit Tata Steel, the employer, to keep running the Port Talbot blast furnaces, but without the burden of the DB pension scheme  – and the scheme would enter the Pension Protection Fund.  This could represent the scheme being ‘de-linked’ and ‘de-risked’.  Such flexibility for employers who are in trouble is a long-standing feature of our pension system.  It helps firms who genuinely cannot afford to meet their pension liabilities but want to preserve jobs and keep the business going.  To allow Tata Steel to continue running the steel business but not have to support the old pension scheme would require a deal with the Pensions Regulator and the PPF Lifeboat Fund, an RAA or ‘Regulated Apportionment Arrangement’.

Or will Regulator allow a standalone scheme:  However, there is also a suggestion that the trustees are still looking for the scheme to be allowed to run on as a standalone scheme without actually going into the PPF.  This was the original premise of the Consultation but would require huge reductions to past benefits and would also involve ‘de-linking’ the scheme but it is unlikely to be completely ‘de-risked’ since the trustees would still need to earn investment returns over time to help meet the liabilities.  It could be a very different outcome for members from PPF entry and was another of the options suggested in the Consultation.  This would mean the scheme may not enter the PPF, but would stay outside it, with the trustees continuing the run the scheme on a low-risk basis, trying to ensure it has enough money to pay the pensions as they become due.  Whether or not they would be able to pay full benefits, or reduced benefits may also be part of ongoing discussions.

Key question – what will happen to guarantees given by Tata Steel to £15billion pension scheme?:  The future of the British Steel Pension Scheme may lie in the hands of the Pensions Regulator and the PPF – unless the Government does actually tear up pensions law for Tata – this seems less likely.  Which outcome is achieved, will also partly depend on what happens to the generous guarantees  that Tata Steel has offered to the pension scheme in the past.  It has been reported that a share of Tata Steel assets were pledged to the scheme trustees instead of pension contributions, in order to improve the deficit position of the scheme in past years and to provide extra funding if the scheme was in trouble.  If those assets are included as part of the pension assets, then the trustees may believe they have enough money to run the scheme on a self-sufficiency basis.  It may also, however, be part of the negotiations with the PPF and Pensions Regulator in order to agree an RAA deal.  Such negotiations are always complex and we await further details with interest.

So it’s great to see jobs secured and we await further details about the future of this major UK pension scheme.  The Pensions Regulator must ensure that it does its best to protect the PPF and the integrity of our pension system.

December 7, 2016   No Comments

Autumn Statement has a bit of good news for savers

23 November 2016

  • Autumn Statement is missed opportunity to address social care crisis
  • State Pension triple lock seems under threat
  • Chancellor confirms intention to ban pension cold calling

The Chancellor’s Autumn Statement had no real surprises for pensions or savers.  There are some tweaks to pension rules, but the biggest disappointment for me is that there is no acknowledgement of the social care crisis.  The Chancellor started by saying the aim of his budget is to prepare and support the economy for a new Chapter.  Part of this new chapter includes the aging of our population.  This is a huge social issue as baby boomers reach their 60s and are heading for longer lives than previous generations.

I’m delighted to see a greater sense of urgency for new infrastructure and housing investment, this is vital for the future success of our economy.  I hope that our own long-term domestic investment funds – in particular pension funds and insurance assets – will be brought into Government to ensure they can participate in such investments.  However, it is really disappointing that there were no new savings incentives to help families set money aside for social care and not enough extra public funding to ensure decent care can be delivered to those elderly people who are currently denied the help they need.

Here is a summary of the measures and my thoughts:

  • Chancellor has not recognised the scale of the challenge the country faces in social care

The Chancellor has missed an opportunity to really signal that the Government cares about the social care crisis.  The country has no money set aside for elderly care – families do not even know that the NHS cannot be relied on to provide care.  The NHS will step in under some circumstances, but most families will find that they have to fund care themselves.  If they don’t have any savings, then they will be at the mercy of cash-strapped councils who are cutting back care provision and provide only a bare minimum.  New savings incentives for social care are needed urgently, not just to ensure at least some families will save for care, but also to help people realise that they need to think about this.  The NHS does not and cannot look after increasing numbers of older people from cradle to grave.  In an aging population where it is estimated that over 1million older people who need care now are not getting it.  Without more funding this can’t be delivered.  Allowing councils to raise an extra £2billion in council tax for care by 2020 is simply not enough.  The needs are higher than that already and the problem is only getting worse.  Employers could be incentivised to help workers with care savings plans, perhaps with elderly care vouchers but currently there is no help at all for employers or employees to provide for future care needs.  This will have spillover effects on our precious NHS, because we can’t cut social care without hitting NHS.  So taxpayers will keep having to put more money into the NHS if there is not extra funding for social care.

  • Good news for pensions – Government will consult on banning pension cold calling and further measures to crack down on pension scams

It is great to see that the Chancellor has confirmed he will consult on banning all cold calling for pensions and also look for other ways to clamp down on pension scams and frauds.  This is most welcome.  By making pension cold calling illegal, it will be much easier to help people understand that those who do contact them out of the blue about their pensions are acting against the law.  We must do as much as we possibly can to protect people’s precious pension savings.

  • Triple lock looks under threat beyond 2020 – watch out for more developments

The Chancellor’s speech signalled pretty clearly that the State Pension triple lock is only safe until 2020.  He talked about the need to adjust to rising longevity and alluded to a review of State Pension uprating.  Currently, the law only requires Basic State Pensions and new State Pension to be uprated in line with earnings after 2020.  I would like to see a double lock announced, whereby State Pensions would rise in line with either earnings or prices.  Currently, the Additional State Pensions only rise in line with prices.  Perhaps the Government could consider increasing all aspects of state pensions in line with a double lock to simplify the system.

  • Reduced Money Purchase Annual Allowance cut from £10,000 to £4000. Why not to £3,600?

The Chancellor will reduce the amount of new money someone over age 55 can contribute to a pension after they have already taken some money out of past pension savings.  Currently, those who have already taken money out of their pensions under so-called ‘flexible access’, can put a further £10,000 a year into new pension savings and get tax relief on that.  The Chancellor plans to reduce that to £4,000 a year instead. This will raise revenue for the Treasury, but it does seem a shame that he did not decide to just reduce the new MPAA to £3,600 a year, which would align it with the maximum amount that non-taxpayers are allowed to pay into a pension with a 25% bonus of basic rate tax relief being added.

  • Encourage British pension funds and insurers to invest in infrastructure and social housing

The Chancellor has announced that it will extend the UK Guarantees Scheme for infrastructure bonds and loans and that it is working with ‘industry’ on construction-only guarantees.  I do hope the new Ministerial group on delivery of infrastructure projects will work closely with UK pension funds and insurers so that British people’s pensions and long-term savings can help fund long-term improvements in the British economy

Good news for savers:

  • A new 3-year NS&I savings bond with market-beating interest rate of 2.2% from next Spring

It is really important to encourage more people to save and these bonds will be of some help to savers who have lost out from Bank of England’s policies.  The Chancellor plans to bring back the special savings bonds that were offered to the over 65s before the 2015 General Election.  This will allow anyone over age 16 to put up to £3000 into a new National Savings and Investment product that will pay 2.2% interest.  It will be available for 12 months from next Spring.  This will help some savers who have suffered so much for exceptionally low interest rates.  There are already tax breaks for savers, who can earn up to £5,000 a year in savings income tax free but the interest rates on savings accounts have fallen so low that savers need more help.

November 23, 2016   No Comments

Pension consequences of QE could undermine policy intent

4 August 2016

  • Further pain for UK pensions as QE worsens deficits and increases annuity costs
  • Bank of England statement completely ignores pension impacts of its policies
  • Estimates suggest deficits now approaching £1trillion – this cannot be sustainable
  • Government needs to consider help for employers

Today’s decision by the Bank of England to cut short-term interest rates and expand the QE programme is another blow for UK pensions.  Both defined benefit and defined contribution pensions have become more expensive as rates keep falling.

Lower rates make pensions more expensive:  The amount of money that is needed to pay promised pensions over future decades depends on how much return one is expected to earn on the money set aside for pensions right now.  The lower the future expected returns, the more money must be put in today.  The cost of pensions, whether Defined Benefit or Defined Contributions, ultimately depends on the returns on gilts.  As gilt yields fall following QE, annuity rates fall and pensions become more expensive.

Rises in asset prices don’t offset rise in the liabilities so pension deficits worsen:  The sensitivity analysis shows that every one percentage point fall in long gilt yields will increase the average pension fund’s liabilities by 20%, while its asset values will only increase by around 7-10%.  Therefore, as gilt yields decline, pension deficits increase and any rise in asset prices is less than the rise in the liabilities or annuity costs.

Deficits are approaching £1trillion:  Hymans Robertson estimated that deficits of UK final salary-type schemes post-Brexit had risen to £935billion.  A further fall in interest rates as a result of today’s Bank of England announcement will see this figure increase further towards the £1trillion mark.  The value of liabilities, as measured at today’s interest rates, is well over £2trillion.

This damaging side-effect of monetary policy means bigger burdens on UK employers:  The consequences of rising deficits are that employers struggling to support these schemes face pressure to put in more money.  The more money they put into the pension scheme, the less they can spend on supporting their operations.  This undermines the aims of QE which is meant to stimulate the economy as this supposedly expansionary policy weakens the ability of the employer to grow its business.  So monetary policy that is meant to boost growth has a damaging side-effect that can undermine companies.  Ultimately, more employers may fail as pension deficits balloon.  That would mean pension scheme members enter the PPF and their benefits are not paid in full.

Trustees caught between a rock and a hard place – need to take more risk, but expected to take less:  Trustees of pension schemes, whose deficits keep rising, are facing almost impossible investment dilemmas.  They are locked into a vicious circle and struggle to break out.  If the scheme deficit has risen, trustees need to consider asking the employer to put more money in to fill the shortfall.  But if the employer has already put huge sums in or cannot afford to do more at the moment, then trustees ideally need to find other ways to reduce the deficit.  This means achieving better investment returns or reducing the benefits (which is not normally allowed under UK pensions law unless the employer is about to go bust).  So trustees would in theory need to take more investment risk, buying assets that can be expected to outperform their liabilities, to reduce the deficit over time.  However, in practice, trustees are usually advised to take less risk, not more risk, if the employer is considered less able to fund the deficit.  They are told to ‘de-risk’ by buying assets that better match their liabilities.

‘De-risking’ becomes a vicious circle that ultimately increases risk of failure:  Trying to ‘de-risk’ generally means buying gilts (or other high quality bonds or hedging), since these are supposed to better match the performance of the schemes’ liabilities.  As liabilities are calculated with reference to gilt yields (conventional actuarial basis) or AA corporate bond yields (accounting measure), gilts and bonds are considered the assets that will best match the liabilities.  But buying more gilts or bonds will, at the margin, force yields down further, especially in light of further QE (buying £50bn of gilts and £10bn of corporate bonds).  Trustees will be competing with the Bank of England for scarce assets and pushing yields even lower and their scheme deficit will keep rising – a classic vicious circle.

Need to outperform liabilities, not just match them and gilts are not a perfect match anyway:  In practice, although gilts and bonds may be a closer proxy for the liabilities than other asset classes, they do not actually match liabilities properly.  There will still be duration and inflation mis-matching, as well as rising longevity, so even buying gilts may not prevent a rising deficit.  And there is a further problem.  If the employer cannot manage to meet the deficit payments, the trustees really need to invest in assets that will outperform the liabilities, not just match them, which means taking more risk, not less.  They seem caught in a trap at the moment.

Index-linked gilt yields are negative so trustees already face deflation:  Pension schemes are facing a further dangerous dilemma in addition to the pure interest rate impact on their liabilities.  Index-linked gilt yields have been negative for some time and the more negative the index-linked yield becomes, the more impossible it is for pension schemes to match their index-linked liabilities over time.  There are no ‘safe’ assets that pension trustees can buy to match their inflation increases.  This further drives them to need to take investment risk.  Indeed, this is what the Bank of England specifically suggests it is expecting, however pension schemes have been unable to do so because they are frightened of the employer position weakening further.

 

Bank of England seems oblivious to the pension impacts of its policies:  This is what the Bank said today:  “The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that are used to determine the cost of borrowing for households and businesses.  It is also likely to trigger portfolio rebalancing into riskier assets by current holders of government bonds, further enhancing the supply of credit to the broader economy.”  There is no mention of the effects of this policy on pension funds.  In fact, if pension funds are unable to move into riskier assets, the policy is actually going to damage growth in some cases, rather than boost it.  Weakening parts of corporate UK is hardly helping the economy.  Monetary policy is also risking poorer pensioners in future via the impact on annuity costs.  Thankfully, DC pension investors are no longer forced to annuitise too soon if they would rather wait.

 

Government must address these pension problems urgently:  The Government has given some relief to DC scheme investors with the freedom and choice reforms.  DC savers are no longer effectively forced to buy an annuity if they want to take just a small amount out of their fund.  However, there has been no such relief for employers.  If the Bank of England ignores the effect of monetary policy on pension schemes, Government and the Pensions Regulator need to take the issue more seriously.  So far, very little has been done to address the stress on employers.  I had started some work on this but it did not receive sufficient attention and is even more urgent in light of today’s announcement.

 

Trustees and employers seem frightened to use flexibilities already built into UK pension system:  The UK pension system does have significant flexibilities which could help employers and trustees cope with difficult circumstances, however there seems to have been a reluctance to use the leeway designed to alleviate these burdens.

 

Must not just help one favoured scheme:  The problems of Tata Steel and others have highlighted how many big businesses are simply unable to afford paying the full pension promises at current interest rates.  The costs have mushroomed out of all proportion to previous expectations.  The British Steel consultation proposed law changes to allow its trustees to cut members’ benefits without consent and even to make them worse off than going into the PPF itself.  I believe this would be unwise and set a dangerous precedent.  Rather than trying just one favoured employer, the Government needs to look at the whole system.  How can employers and trustees manage their liabilities in the best long-term interests of the both the members and the business in light of QE?  Too much comment seems to focus on the apparent funding levels as measured today, rather than ensuring the strength of the sponsoring employer to back the scheme in future decades.

 

In danger of making the best the enemy of the good:  Liability management exercises, scheme pooling, longer recovery plans, member consent to benefit changes and benefit streamlining are all possible methods of managing liabilities over time in more affordable ways.  Encouraging members with small entitlements to transfer to DC schemes and facilitating small benefit changes such as a statutory over-ride for schemes that need to change the inflation measure used for uprating could provide much-needed relief for many schemes.  Offering pension schemes favourable terms for investing in infrastructure and social housing projects could also provide some upside for pensions while boosting the economy.  It is time the authorities addressed the serious side effects of monetary policy on UK pensions before more schemes fail.  I was working on these issues but there was no sense of urgency, I hope that the new Government will take this matter more seriously now.

August 4, 2016   2 Comments

Social revolution underway as millions more over 50s keep working

28 July, 2016

  • Important new Statistical Series released today to track trends in later life working
  • Massive increase in labour force participation for over 50s since the 1980s
  • Older women show largest employment rise while proportion age 70-74 in work has doubled
  • Rise in female participation pre-dates increase in state pension age

There is a social revolution underway, which can benefit millions of people in the UK, which is seeing increasing numbers of over 50s stay in work, continuing to increase their lifetime income, improving the productive potential of the economy and in many cases ensuring a better quality of life.  As older men and women realise it is not beneficial to aspire to retire when still relatively young, the trends in employment among people over age 50 are striking.

The DWP has today released figures that will form a brand new data set for the future.  They will track the trends in later life working and help us monitor how the world of work is developing for the over 50s.  The new statistical series shows changes in employment trends for women and men since the 1980s.

Following my role as the Government’s Business Champion for Older Workers and Pensions Minister, I have instigated continued statistical analysis of employment trends and engagement with business to help more people and employers benefit from the skills and experience of the more mature workforce that is on offer with an aging population.  The statistics released today demonstrate the historical trends that have seen sharp increases in number of over 50s staying in work.

This is all part of a much wider exercise in encouraging people to keep working, if they can and if they want or need to, and encouraging employers to recognise the enormous value that older workers offer to their businesses.

People are not necessarily ‘old’, in a conventional sense, at age 50, 60 or 70 and are increasingly choosing to keep working.  This can be good news for them, good for their employer and the economy too.  It will boost their lifetime income and can also be better for their health and general wellbeing.

Of course, it is also true that some people cannot work longer, or feel forced to go on when they would rather stop, but this is the minority.  Surveys that were part of my Business Champion for Older Workers report ‘A new vision for older workers – Retain Retrain Recruit’ showed that most people in their fifties want to keep working past their state pension age.

In 21st Century Britain, after all the successes in healthcare and working conditions, it makes sense to celebrate the increased employment of older people and to take advantage of the skills and talents of our aging population.

July 28, 2016   1 Comment

Pensions are too important to downgrade

18 July 2016

  • Potential dangers ahead for pensions if responsibility moves from DWP to Treasury
  • Could be threats to auto-enrolment
  • Must continue to address employer challenges in funding Defined Benefit schemes

It would seem that the role of Pensions Minister is being downgraded by the new Government.

What does that mean?

At the moment, we just don’t know, however it could be that this poses threats to future pensions and we must be alert to the dangers.  Pensions are vital for the long-term future of millions of people in our country.  We are in the middle of a major programme of reform and it needs to be guided carefully, otherwise there are dangers that pensions policy could be derailed.

What are the risks of downgrading Pensions in DWP?

Pensions Bill:  The recent Queen’s Speech contained provision for a Pensions Bill, which I fought really hard to obtain.  It is designed to protect pensions.  Currently, people’s pensions are at risk if the trust-based DC pension scheme they are saving in winds up.  I do hope the new Government will not put these important measures on hold.  Members’ pensions are not safe and the protections should have been put in place long ago, they are urgently required.  The new Bill would also introduce a cap on the exit charges on members’ funds when they want to move from one scheme to another.  At the moment, members can lose over 5% of their money just because they need to move scheme.  The new law would cap those charges at much lower levels.

Auto-enrolment:  Currently, policy responsibility for auto-enrolment lies in the DWP.  If the Treasury takes this over, there are risks to the programme.  Auto-enrolment is working really well, as millions of workers are saving in pension schemes for the first time, with the help of their employer.   We are establishing as the norm that every employer is expected to provide a pension for their staff.  This is a major change but is an essential part of the radical pension reforms that are underway.  The new state pension will have no more earnings related elements building up, so all the earnings linked retirement income must come from private pensions or other assets.  We must not let the EU referendum fallout derail this vital programme.

Defined Benefit Pension schemes:  At the moment, the DWP is responsible for our system of pension protection and there are over 11 million workers saving in Defined Benefit schemes who need a robust protection framework.  Funding levels of many schemes have deteriorated sharply, despite employers putting significant sums into them, and the Government urgently needs to address the challenges facing trustees and employers in connection with meeting their pension promises.  Work is already underway in the DWP which I had initiated last year and accelerated recently, but it is complex and needs careful handling.  A new Pensions Minister needs to engage with this work and manage the issues surrounding the British Steel pension consultation and the knock-on effects on all other schemes.

Pension Wise:  Responsibility for Pension Wise recently moved from Treasury to the DWP, to ensure all publicly-provided pensions guidance is located in one place.  As DWP was already responsible for the Pensions Advisory Service (TPAS), it made sense to put Pension Wise and TPAS together and form a new guidance body to help people engage with planning their later life income.  This was also due to be in the new Pensions Bill and I do hope it goes ahead, even if based within Treasury again, rather than DWP.  The public need help and guidance to understand how to plan their retirement income and customer satisfaction with the Pension Wise service has been very high.  The new Government must not let this be a casualty of the recent political upheavals.

Bringing private pensions policy under one roof

Last week I suggested to Number 10 that I would be delighted to help the new Government with a radical overhaul of pensions policy responsibility.  This could see all private pensions policy joined together in one place, under a Minister in the Treasury, while State Pension policy stays within the Department for Work and Pensions.  Indeed, I proposed this to David Cameron last year after he asked me to be Pensions Minister but he decided against it.

I think it makes sense for private pension savings policy to be run in one place, rather than being split across Departments.  I would have been happy to do that in the new Government but only based in the Treasury, not the DWP.  I wonder if there may be a move in that direction?

Why would it make sense?

As the new state pension means an end to contracting out, the role of the DWP in private pensions is much reduced.  Under the old system, millions of people were building a part of their state pension in a private pension scheme, paying lower National Insurance in exchange for giving up rights to part of their state pension.  This policy has ended, so the state and private pensions are now totally separate.  Therefore, it might be a good time to merge private pension policy together in one place rather than having contract-based private pensions policy resting in the Treasury, while trust-based pensions policy is made in DWP.  There are currently two different regimes, one for pension schemes set up under trust and one for pension schemes that are under contract law.  Bringing these policies together could help streamline and rationalise the rules, although there would be enormous complexity in doing so.

July 18, 2016   2 Comments

My warnings in 2006 about excess public spending – the irresponsibility was clear even then

It is simply incredible to deny that the Labour Government spent too much

Failure to recognise or admit past over-spending is deeply worrying

This is an article I wrote in 2006, exposing the excessive Government spending under Gordon Brown. It was clear to me even back then, and is still clear now, that the Government was spending far too much. I warned that this was the wrong policy, but it continued.   Ed Balls and Ed Milliband were in charge alongside Gordon Brown at that time, presiding over this huge rise in public sector spending. The ONS figures in my article showed the spending was on consumption, not investment.  Please look at the table, which highlights the enormous increases in Government spending that occurred from 1999 onwards. It is astonishing that Ed Milliband refuses to admit or accept these mistakes.

The Government was spending far more money than the country could afford and continued doing so, despite good growth in the economy.  I warned that this was dangerously short-sighted, especially in view of the aging population which meant we needed to be saving more, not increasing borrowing.

The Labour Government did not understand how to control spending taxpayers’ money.  Taxpayers were working hard, paying their taxes and trusting the Government to spend that money wisely, yet unfortunately, despite constant talk of being ‘prudent’ and ending ‘boom and bust’, Labour actually spent far too much, not on investing in our future but on increasing public sector employment and pay and expanding tax credits, rather than trying to ensure a thriving private sector to boost growth.  With such enormous debts having been built up, it is vital that the private sector creates growth and employment to help repay past overspending.  The arguments that we have to end ‘austerity’ seem to suggest that we are living in a world where the ‘deficit problem’ is solved and hard-working taxpayers can support ongoing rises in spending despite the massive national debts that were left in 2010.  This is just not true.

The ONS stopped producing the Government consumption series after 2004, but excessive Government spending continued right up to the financial crisis, which left us without any reserves of taxpayers’ money to deal with the economic downturn that ensued.  Labour handed over in 2010 saying ‘there is no money’ – if only they had been more prudent, as they promised to be.  The same people who were in charge at the time are promising the same again, they seem to have learned little since then.  It is worrying that Ed Milliband has refused to admit Labour spent too much.  Furthermore, in 2012, he praised the Socialist policies in France which promised to increase taxes and Government spending.  Those policies have left the French economy with massive unemployment and negative growth.

By contrast, the UK economy has had good growth and a huge fall in unemployment, driving better prospects for the vast majority of British citizens.  It is a slow process to recover from such a major crisis, while also trying to deal with past debts, but the Government since 2010 has steered a path to ensure job creation is a priority while also being careful with public spending.  That’s not easy and they won’t always get it right, but it is vital to have that aim.  The millions in the middle, who want to work, also want to know the Government won’t be imprudent with their money again.

We need to face the truth.  I have voted Labour in the past many times, but I truly believe that the risk of putting Labour and the SNP in charge of our public finances will mean more borrowing that our children will have to repay and more spending in Scotland at the expense of England, Wales and Northern Ireland.  If the past over-spending is denied, then what will stop the same thing happening again?  To suggest that we can ignore the public sector debt and once again go back to spending money we don’t have is an illusion.

I do hope that the ordinary, sensible members of the British public will see the dangers and not take that risk.  The country is at a cross-roads, it’s time to decide whether we continue with policies that are trying to ensure job creation and private sector revival, or return to the old days of tax and spend to excess.  We shall have to see what the people decide.

Here is the article I wrote in 2006, please have a look at it and especially the figures for Government spending:

Demographic dangers for growth – Brown has been imprudent

Sunday Telegraph, Economic Agenda Column, published 27th August 2006. Edited highlights

full article link here: http://www.telegraph.co.uk/finance/2946231/Economic-Agenda-Why-Brown-has-been-imprudent.html

The UK economy has performed impressively for an extended period of time and the Treasury has received praise for this achievement.  There has been much debate about the underlying causes of this sustained growth and whether it really is evidence of prudent economic management, but one factor which has not been greatly explored is the contribution of demography.  In fact, the economic effects of demographic trends are worth more serious consideration.

During the 1980’s and 1990’s, the economy benefited from a significant rise in the number of people of working age.  At the same time, the birth rate fell sharply so there were fewer children to support.  In addition, the number of pensioners has been relatively stable.  The fall in number of dependents and rising numbers of workers helped sustain consumption and bolster growth, giving a very favourable underpinning to economic performance.

This demographic boost, however, is soon set to unwind.  From 2010 or so, the number of pensioners will increase sharply, while the number of workers falls, so the proportion of the population in employment is forecast to decline.  As more people try to live on pension income, rather than earnings, consumption is likely to fall and the burdens on working taxpayers will rise.  Thus, the slowdown in the growth of the workforce and the increase in spending on age-related support, mean demographic trends will have adverse effects on economic growth after 2010.

These changes pose many economic challenges.  Of course, the trends have been in place for many years.  So has the Government been taking advantage of these ‘good years’ to lay the foundations of a meaningful response to dealing with the sudden rise in old-age dependency, thereby minimising the negative impact of the ‘demographic drag’?  Sadly, it seems to have squandered this opportunity.

Our pension system is not well structured for the demographic challenges, has the Government perhaps been preparing the economy in other ways for this looming problem?  For example, has the fiscal situation been reined in, building up surpluses to prepare for the forthcoming strains on public spending?  Sadly not.  Even though taxation has increased, public spending has increased even faster, so the budget deficit has worsened.

GDP GROWTH AT MARKET PRICES 1993-2004

Year

Total GDP Mkt Prices

y/y % change

Central Gov Consumption

 

y/y % change

Local Gov Consumption

 

y/y % change

Household Consumption

 

y/y % change

1993

5.0

3.8

-1.9

5.8

1994

6.0

3.1

3.7

5.0

1995

5.7

2.9

4.4

5.1

1996

6.3

5.1

2.2

7.2

1997

6.0

1.5

0.9

6.0

1998

6.1

3.5

4.6

6.6

1999

5.3

6.6

11.3

6.3

2000

5.1

7.0

7.7

5.8

2001

4.6

7.2

6.6

5.3

2002

5.2

9.7

8.4

5.1

2003

5.9

9.4

9.6

4.9

2004

6.0

6.8

9.2

5.1

 

Source:  UK Input Output Analysis, ONS

 

Since 1997, the contribution to economic growth from both central and local government spending has risen enormously, while gross fixed capital formation and savings levels have declined.  Local and central government consumption spending rose sharply after 1998, outstripping total GDP growth every year by a substantial margin (see Table ).

Since 2000, over half the new jobs created have been in the public sector and the long-term pension spending commitments from unfunded public sector schemes are also enormous.

A strongly expanding public sector, with sharp rises in public (and private sector) borrowing has sustained economic activity until now.  Yet, the forthcoming demographic shift would suggest that we actually needed increased saving, not increased borrowing, to prepare for future needs.

From around 2010 there will be increasing numbers of people not working, an increasing proportion of the population who are not economically productive, fewer workers to create new wealth and a sharp rise in the numbers of pensioners struggling to manage on the inadequate level of UK state pensions and dwindling private pensions.  As a larger proportion of the population has lower incomes, consumption is likely to fall, and growth will suffer.

During years when the economy should have been building up national savings to prepare for the forthcoming demographic drag, the Government has actually presided over a sharp drop in saving and huge rises in borrowing. Economic policy has focused on sustaining growth in the short-term, by spending and borrowing, and has squandered the demographic boost that should have enabled more saving to prepare for the ageing population.  Far from prudent management, this suggests a short-sighted agenda of going for growth now and leaving the next administration to cope with the consequences of demographic inevitability.

Dr. Ros Altmann

August 2006

ENDS

May 5, 2015   4 Comments

The most important election for decades – don’t gamble our future on policies that failed in the past

30 April 2015

This is my honest assessment of the economic and political realities facing the UK

Having given my views on finance and economics for years, I am writing this blog to set out some thoughts on the upcoming election.   I have previously voted Labour and LibDem and each party has some excellent politicians, but the current economic and political realities lead me to conclude that the future of the country I love is at risk if the Conservatives do not form the next Government.  I am not ‘tribal’ in my political allegiances.  I don’t blindly follow a particular party or ideology.  But putting Labour back in charge at this time could be disastrous for the United Kingdom.

Let’s look at the reality, not the rhetoric: I write this even though I know I will be criticised in some quarters for being ‘political’ – which seems to be a derogatory term nowadays, although I’m not sure how one can give views about party policies without being political.  Giving my carefully considered assessment does not change me as a person, nor my values of financial fairness and social justice and my concern for ordinary British citizens.  I hope you will consider the evidence.

The economy:  In 2010, the UK was saddled with a huge deficit (like that of Greece today) and high unemployment.  Now, five years later, the deficit has halved as a share of our economy, we have had growth when the countries around us have been struggling and most importantly employment levels are the highest ever as private sector job creation has boomed.

The policies have worked:  Other countries and the IMF recognise our economic strategy is working well.  However, Labour did not understand.  They said the policies which have created two million new jobs would be a disaster.  Indeed, in 2012, Ed Milliband praised the policies of the new Socialist Government of Francois Hollande, saying he wanted to emulate them over here.  They have actually produced rising unemployment and economic weakness in France.

The Conservatives have proved to be the party of the workers:  Just look at the evidence – falling unemployment and record employment levels.  Unemployment was 2.5 million in May 2010, it is now under 1.9 million.  Most of our EU neighbours still have unemployment rates well above ours.  The number of people claiming JobSeekers Allowance was 1.5million in May 2010, it is now around half that level (0.79m). The employment rate has climbed to the highest level since ONS records began in 1971.  The UK has created more new jobs since 2010 than the rest of the 27 EU countries put together. And two million more apprenticeships.

Nearly all new jobs created are full-time (four out of every five are full-time jobs):    Some commentators have complained that this employment record is still not good enough – ignoring the realities all around us.  Focussing only on negatives seems to be deliberately undermining the real achievement that this jobs boom represents.  Yes, wages have risen only slowly but that will happen when recovering from such a deep economic downturn.  It takes time.

The task is far from finished:  Listening to some of the other parties, it seems that they believe the economy is fine now and we can return to the days of borrow and spend.  That is an illusion.  Promises that they can spend more, borrow more and still keep growth and jobs going are not credible.  We need continuity to ensure the benefits of recovery spread more widely to everyone.  Without growth and a thriving private sector, we cannot repay the debts we owe and our children will be left to pick up the pieces of today’s failure to recognise reality.  Changing course now when the economy is not yet healed is too risky.

Other parties are taking growth for granted – what is their plan to boost private sector employment and pay?  Labour and the SNP have failed to set out a strategy for helping businesses create more jobs and afford to pay higher wages.  Redistributing income and increasing regulation will not pay off past debts or create growth.  Higher pay levels depend on a stronger economy, but the other parties seem to be taking growth for granted.  It may sound enticing to promise more Government expenditure, but if growth is lower we all lose.  It is vital to find a good balance.

Financial fairness for all:    British people want to know that their earnings and savings can benefit themselves and their families as well as wanting to help those in our country who are struggling.  That requires policymakers to strike a careful balance.  Government spending is your money, it comes from the taxes you pay.  Being part of a caring but fair community is important, but it needs policies which will deliver growth and improved prosperity so we can afford to finance public spending.

This is a fantastic country but it still faces huge challenges:  Now is not the time for change, now is the time to continue the policies that are working.  Being enticed by talk of returning to more public spending and borrowing we will be putting all the progress at risk.  Which party leaders are offering the best prospects for our country as a whole?  Those who have created 2 million jobs, 2 million apprenticeships and record employment.  Or those who handed over saying ‘There is no money’?

This is my honest assessment:  I stress that I’m saying this as someone who does not have a blind allegiance to any one party or ideology.  I care about the future of this country and this is how I genuinely see things.  I have set out a logical rather than ideological narrative and hope you will consider my thoughts in a spirit of genuine open-mindedness.

ENDS

April 30, 2015   1 Comment

A Savings Revolution to follow the Pensions Revolution

18 March 2015

We had the Pensions Revolution last year, now comes the Savings Revolution

  • 95% of savers will pay no tax on their savings – will be popular
  • 5m will be allowed to sell their annuity – that’s great news
  • But cutting Lifetime Allowance for pensions is really bad policy
  • Lifetime limit should only apply to DB, but abolished for DC

So there we have it.  The last Budget before the General Election.  A mix of moves to please as many of the electorate as possible, but without committing massive amounts of extra spending.  There is help for savers, help for first-time housebuyers, but nothing to help with the social care crisis.

The main news this time is the help for savers.  This is unquestionably good news for ordinary savers with 17million people benefiting from the decision to scrap basic rate tax on the first £1000 of savings income each year.  This will be popular, as 95% of savers will not pay any tax on their savings income.  Savers have paid tax on their income when they earned the money, so allowing them to earn interest on it free of tax makes sense.

What might this mean for savers?

People with £50,000 savings may not pay any income tax on their savings:  If we assume savers earn 2% interest on their money, then they can have £50,000 in a savings account and will still pay no tax on their income from those savings.  Even if they earn 4% interest (those days seem like a distant memory but who knows they may return) then someone with £25,000 of savings would still pay not tax on their interest.

Non-taxpayers won’t have to reclaim the 20% tax deducted from their income:  At the moment, banks and building societies have to deduct 20% tax from all interest income before it is paid out and non-taxpayers have to reclaim the tax withheld.  In many cases, this money is never actually claimed as the recipients do not know they have to do so.  Pensioners are one of the groups least likely to reclaim the tax, so this will be of benefit to them.

Higher rate taxpayers will have to pay the additional tax above basic rate and the top 5% of savers will still be able to shelter money in ISAs to receive tax free savings income.

ISA savings will also become more flexible:  At the moment, if you invest the full £15,240 into an ISA at the start of the year and then take some money out, you cannot put more back again that year.  In future, the Government plans to allow you to put money in, then take it out again if you need to and reinvest back up to the full annual ISA allowance later in the same tax year.  It is not clear how this will be tracked and I can foresee some administration issues, but the principle is a good one.

So what about pensions – some good news, some not good news:  After last year’s bombshell, we could not possibly expect a similar scale of change.  Building on the pensions revolution started in last year’s Budget, the Chancellor wants to extend the new idea of freedom and choice much more widely.  However, to pay for the giveaway to savers, the lifetime limit on pensions has been cut sharply again.

Undoing unwanted annuities:  The pensions revolution that proved so popular last year has been extended to try to include those who had already bought annuities before the rules forcing most pension savers to buy annuities were scrapped.  The Chancellor intends to offer those who were previously forced to lock their pension funds into irreversible annuities, the chance to sell them again.  Many never actually wanted, to annuitise or bought unsuitable products and understandably felt most aggrieved that future pension savers had freedoms they were denied.  So a consultation has been launched https://www.gov.uk/government/consultations/creating-a-secondary-annuity-market-call-for-evidence that proposes allowing people to sell their annuities.  They will receive a cash lump sum that they can either spend – but will be taxed on as income – or can reinvest into a pension drawdown fund and then only pay tax when they withdraw their money.  This is a fair and sensible policy.

Regulatory protection and advice crucial:  Of course there are dangers that people will be ripped off if companies buying their annuities offer a poor deal.  Many annuitants paid high charges when buying the annuity in the first place or received poor value, so that would be adding insult to injury.  Therefore, we need careful regulatory oversight of the second-hand annuity market, perhaps with controls on charges and making sure people get proper independent advice before trading in their annuity.  The Pension Wise guidance service is likely to be extended to offer help and information with the decision, but advice and regulatory protection are really needed.  Of course, nobody will be forced to sell their annuity.  It will be their choice, but one which they would not otherwise have.

There are circumstances in which allowing people to sell their annuity will be sensible: Those with small pension funds and plenty of other retirement income may welcome the chance to take the cash for urgent expenses or debt repayment.  Others may need to provide a pension for a partner which was not included in their annuity.  Those with guaranteed annuity rates that only offered single life products will have a chance to cover their partner and those who prefer to leave their pension money invested for a few more years will be able to do so, whereas under the old rules they would have needed huge sums (around £100,000 or more) to be able to use drawdown.  Controls on charges or other customer protection might be needed, but at least people will not be stuck for life in an unsuitable product.

However, the other big change to pensions is far less welcome:  Cutting the lifetime limit from £1.25m to £1m is very disappointing.  Indeed, in 2014 the lifetime limit was still £1.5m, it is now £1.25m and cutting it down to £1m is a draconian change.  Cutting the lifetime allowance so sharply makes it much harder for people to plan their pension savings over the long-term.  This is expected to raise £600m in extra tax revenue and will hit many people in final salary or defined benefit pension schemes, as well as those in defined contribution pensions.  The Government suggests that only around 4% of pension pots are above £1million and that it will offer protection for those already near or over the limit, however it is really a shame that this policy has been introduced.

Lowering LTA adds more complexity and penalises investment success – both are bad for pensions: Firstly, it makes pensions still more complicated by adding yet another layer of protection into the rules.  Secondly, it is a penalty on investment success.  Surely the point of pension saving is to benefit from long-term investment returns.  That means it makes sense to limit the amount people can put in with the help of tax relief, but does not make sense to then try to punish them if their fund grows sharply.

Lifetime limit far more generous for DB schemes than DC:  The lifetime limit of £1m will allow members of defined benefit (final salary/career average) schemes to have a pension of up to £50,000 a year within the limit.  However, members of defined contribution pension schemes (which is the  majority of workers outside the public sector) could only buy a pension worth around £25,000 for £1m (with inflation linking and spouse protection), so the lifetime limit is unfair in this respect due to the calculation methodology of the rules.

A lifetime limit for DB schemes makes more sense, but should be abolished for DC: For members of defined benefit pension schemes, who do not have an actual pot of money but are promised a specific level of pension, perhaps the lifetime limit makes more sense, since they have no control over the investments and the contributions are harder to measure due to fluctuations that occur depending on the scheme’s assessed funding levels.  With defined contribution schemes, the better policy would be to control the amount put in each year but then allow the pot to grow as well as it can, without penalising it if it rises strongly.  Therefore, I would like to see the Lifetime allowance abolished for DC schemes.

Nothing for long-term care:  It is disappointing that there are no new measures to help or encourage or incentivise people to put money aside for funding long-term care needs.  Families are not prepared for care, nor is the Government, yet there is a crisis looming which could eat up the resources of many families who might have been able to put some funds away if they had known about it – and could also bankrupt the NHS.  The next Government will have to get to grips with this crisis urgently, time is running out.

Help for younger first time housebuyers with a pension-style ISA plan:  The new ‘HelptoBuySA’ effectively turns the savings of young people preparing for their first house purchase into house pension plans, by offering the equivalent of basic rate tax relief on their savings.  If they need a house deposit of £15,000 for their first home, they will only need to actually save £12,000 and the Government adds the additional £3,000 they require.

March 18, 2015   2 Comments

Older workers are essential for economic success

22 February 2015

  • Having more over 50s in work is not a threat to younger people’s wages or employment – it is essential for economic progress
  • Studies suggest more older people in employment improves employment and wages for the young
  • In our ageing population, we should welcome higher employment levels for over 50s – if they shift to part-time that may depress average wages but is not a concern long-term
  • Concerns about rising labour force participation by older workers being a threat to younger people are misguided – it is essential for economic progress
  • Failure to encourage longer working lives will imply a larger tax burden on future generations, especially with the aging demographics and rising life expectancy
  • More older workers leads to higher national income, higher national output and more jobs for younger generations
  • We should welcome the rise in part-time workers in later life, which allows an extension of working life that can boost future individual and national income

Keeping more over 50s in employment does not mean fewer jobs for the young: There is extensive evidence showing that having more over 50s in work, is actually associated with both lower unemployment and higher wages for the young. A summary is in a Eurofound study by Rene Boheim [ http://wol.iza.org/articles/effect-of-early-retirement-schemes-on-youth-employment.pdf ] ‘The effect of early retirement schemes on youth employment’ which concludes that increasing retirement age leads to an increase in the wages and employment of younger workers. So it is in the interests of all of us to enable more older people to stay in work.

More over 50s staying in work is a major boost to our economic prospects:  Concerns that later retirement has caused slow wage growth in the post-2008 recovery, despite sharply falling unemployment and the massive job creation of recent years, are misguided. Such simplistic analysis fails to factor in the impact of an aging population and the trend to flexible or part-time work as an alternative to traditional retirement. In fact, these trends are hugely beneficial to our economy and should be celebrated.

The demographics suggest we need to ensure older people are employed for longer: The statistics are startling. Over the next few years, there will be 3.7million more people aged between 50 and state pension age, but 0.7million fewer people aged 16 to 49. Put another way, estimates suggest there will be 13.5million more job vacancies in the UK, but only 7million school-leavers. This net shortfall of workers cannot be filled by immigration of 200,000 a year. With our aging population, business urgently needs to recognise the demographic inevitability – either more over-50s will work longer, or we face declining economic growth.

The contention that early retirement leads to more employment opportunities for young people depends on two assumptions, both of which are flawed: For example, this argument assumes older and younger workers are easily substituted for each other. In fact, the skills of older people such as life and job-specific experience, are generally different from those of younger people who have not yet experienced working life. Therefore, younger and older workers are not normally good substitutes for each other – indeed their roles are often complementary.

There is not a fixed number of jobs in the economy:  It is not true that each older worker in a job denies employment to a younger person. This is not how economies work. There is not a fixed number of jobs. The more spending power in the economy, the more jobs can be created. If companies and individuals earn more, economic activity and employment can increase. In an individual company there may be a fixed number of positions, but only over the short-term. If business is good, the company can create more jobs – but if demand for the company’s goods or services declines, it will reduce the number of jobs. This also applies to the economy as a whole. So keeping more older people in work, means increasing national output, higher lifetime incomes and more money to spend in our aging population. Conversely, if more older people stop work, they will have lower spending power and ultimately there will be fewer jobs for younger people.

Having older people active and productive benefits people of all ages and ensures that more jobs are created:  Younger people’s wages rise as employment rates of older people increase [see Kalwij, Kepteyn and deVos, ‘Retirement of Older workers and employment of the young’] and as the number of workers age 55 and over increases, overall employment and wage levels rise and unemployment falls [see, Munnel and Wu ‘Will delayed retirement by baby boomers lead to higher unemployment among younger workers’].

Historical analysis both in the UK and elsewhere supports this conclusion: For example, after World War II, the dramatic increase in labour force participation by women did not mean fewer jobs for men. Instead, it boosted economic growth as there were more two-earner families with higher disposable income, which created more new jobs as spending power in the economy increased.

UK 1970s’ ‘Job Release Scheme’ failed:  In the 1970s, the UK Government tried to use ‘early retirement’ as a means of addressing youth employment. Its ‘Job Release Scheme’ aimed to encourage older people to leave work and ‘release’ jobs for the young, but the policy failed. Rising early retirement was accompanied by higher unemployment for younger people. Economists subsequently concluded that encouraging more older people to retire is not a way to increase employment prospects for young people over time.  It can actually have the opposite effect.

France has historically tried reducing retirement ages as a policy tool to reduce youth unemployment: From 1971 to 1993 the Government encouraged early retirement, but this led to a fall in employment of both older and younger workers. In contrast, from 1993 to 2005 more older people stayed in work and youth employment rates increased.

There are other examples too: In Germany in the early 1970s, employment of older workers fell by 7 percentage points, but employment for younger workers decreased by 2 percentage points. However, in 1992 the German Government introduced new incentives for older workers to stay in work, leading to a fall in youth unemployment.

February 22, 2015   No Comments

My comments on the Autumn statement

3 December 2014

So what has happened in the Autumn statement?

Summary

  • No change to pensions tax relief but extra tax breaks for joint life annuities
  • Levelling the playing field between annuities and drawdown inherited benefits
  • New tax breaks for ISAs – will be inherited tax free between spouses
  • Tax breaks for carers and careworkers
  • Bigger rise in Pension Credit
  • More generous means-testing calculation for pensioners with pension funds
  • Promise of a pilot back-to-work scheme for older people on benefits
  • Stamp Duty reform to help 98% of housebuyers

What’s missing

  • Measures to incentivise training and employment of older jobseekers
  • Incentives to save for care
  • Incentives for pension funds to invest in infrastructure
  • The name for the Guidance Guarantee service
  • Protection for annuity and pension customers
  • The interest rates that will be paid on pensioner bonds

After the Chancellor’s Budget last March, which was such fantastic news for pensions and ISAs, but a painful shock for many insurers, I assume most of the financial services industry listened anxiously to the Autumn Statement.  They needn’t have worried.

It was, of course, impossible to upstage the Budget’s impact on pensions and the over 50s, but there were some announcements worthy of note.

Pensions tax relief – no change

The Chancellor has decided not to make any changes to pensions tax relief, despite some speculation that this was on the cards.  The pensions tax relief limits remain unchanged and people will still be able to contribute to pensions up to age 75.  After so much upheaval, it is important to allow the system to settle down so that individuals can make serious long-term financial plans in the knowledge that the goalposts won’t be moved.

The new pensions landscape will require significant changes in products and processes and If the government wants the industry to reform, we need a period of stability to allow this to happen.  We need to see interesting innovations from financial services firms, but it does mean that the industry needs time to change technologies and products properly and provide better outcomes for consumers, without fearing further radical overhauls.

Widows and widowers can inherit joint life annuity income tax free and any nominated beneficiary will be allowed to inherit an annuity in future products

New rules about inheriting pensions have been announced – although they were widely leaked before the Chancellor’s Statement.  Under previous rules, those who inherited pensions would pay 55% tax on remaining pension assets in drawdown funds, but that penal tax has now been abolished.  In order to level the playing field between drawdown and annuities somewhat, the Chancellor has announced that the income inherited by widows or widowers from their partner’s ‘joint life’ annuity, as well as beneficiaries of guaranteed term annuities, will also receive the money tax-free if the person passed away before age 75.  Having scrapped the 55% tax on inherited pension drawdown funds and allowing remaining pension assets at death to be passed on as a pension, tax free, it seems right that inherited annuity income should enjoy the same privilege.  Anyone who has already bought joint-life annuity (which is a minority of people, but nevertheless significant) could be better off as a result of this change.  The majority of past annuity purchases, however, were single life products which will not benefit.

Most importantly though, these new rules, coupled with the new Pension Guidance, should help ensure more people cover their partner as well as themselves when buying a lifelong pension income.  The annuity tax rules are also being amended so that joint-life annuities in future can cover any nominated beneficiary, not just a spouse or civil partner.

New tax breaks for ISAs

The new ISA limit for next year will rise in line with cpi to £15,240 from current level of £15,000 (and Junior ISAs to £4,080).  There are also new tax breaks for the 150,000 married ISA savers who die each year.  Currently, when they die, their ISA just goes into their estate and the ISA tax advantages are lost.  However, the Chancellor is proposing that those who die can pass on their ISA accounts to their spouse or civil partner free of tax.  So ISAs will pass on as ISAs, to increase savings income for widows or widowers.  The Treasury is also considering allowing ISAs to invest in crowdfunding debt.

Help for Carers

One of the biggest problems facing families in future is likely to be the cost (both in time and money) of caring for older loved ones.  As the population ages and life expectancy rises, the numbers needing care will rise sharply in future years.  The Chancellor has announced a little extra help for people who are caring for loved ones.  The Carer’s Allowance earnings limit will increase to £110a week next April (it is currently £102pw), which could help more people work part-time without losing Carer’s Allowance.

In addition, the Chancellor is going to extend the £2000 rebate on National Insurance Contributions to cover careworkers.  The Employment Allowance will mean a family who directly employ a careworker earning up to £22,500 a year will not pay any National Insurance.  In addition, careworkers will not be affected by removing the £8,5000 threshold applying to tax on benefits in kind.  The care industry desperately needs more workers and any relief on tax or NI can help the affordability of care for families and improve the poor pay of care staff.

Notional income calculation for means-tested benefits – assume annuity income is received even if not annuitized, so poorest will not lose out by not buying annuities

There has been significant concern that the changes to pension rules could unfairly hit those on lowest incomes, but the Chancellor has addressed this.  There were fears that those on means-tested benefits who did not buy an annuity would be penalised.  Under the previous system, if you had bought an annuity, only the annuity income itself would be included in your income.  However, for those who had a pension fund which was in drawdown, the means-testing benefit calculation would use an estimate of the income you could have received and that ‘notional income’ would be included in your income assessment.  If there had been no change, this would have assumed that the income you received from your pension fund was actually 150% of the amount you could have received from an annuity (rather than just 100% of the annuity which is what you would have had if you’d actually bought one).  This would have meant lower income households were penalised for choosing not to annuitise, which is not the Chancellor’s intention.  So, in order to create a level playing field between annuities and leaving the money invested in your pension fund instead, the notional income calculation for means-testing is being changed from next April.  (The 150% of the equivalent annuity rate was assumed under the old rules because this was the upper limit for capped drawdown and was based on the Government Actuary’s Department estimate of market annuity rates, known as the GAD rate).  It is good news that the lowest income pension savers will not find themselves significantly worse off if they want to keep their money invested in their pension fund.  It will be important for the Guidance to help them realise that they need to keep the money inside their pension fund in order to benefit from these rules.  If they move it to another type of savings account, they lose tax benefits and may find their income is assumed to be higher.  Of course, they could also just spend the money or use it to repay debt, rather than buying an annuity which could also help their long-term financial future.

It is interesting to note that, in fact, the means testing calculation for social care, which was announced in October, had already adopted this new approach, but this does not seem to have been picked up.  The Autumn Statement is another opportunity to highlight this change that will help the poorest older people.  There is no change to the tariff income assumed from savings other than pensions.

Pension Credit uprating

The DWP has decided it will uprate the Pension Credit level in line with the rise in the Basic State Pension, even though this is above inflation.  The Basic State Pension is set to increase by 2.5% next April, a rise of £2.85 to £115.95 a week (from the current level of £113.10).  Pension credit, however, was only due to rise in line with inflation which was 1.2% (and the additional parts of the state pension such as State Second Pension S2P will rise by 1.2%).  However, in order to retain the differential between Basic State Pension and Pension Credit, the Pension Credit Guarantee Credit will increase by the same cash amount as the Basic State Pension i.e. to £151.20 a week for a single pensioner (from £148.35 a week at the moment).  This is slightly more than it otherwise would have increased (about £1-78 a week extra) and will be of help to the poorest pensioners. This move also has implications for the level of the new State Pension that will be introduced from April 2016, since the new single tier state pension will be set to exceed the level of Pension Credit Guarantee Credit, so by increasing this, the new State Pension will also be able to start at a higher level.  It will thus have to be more than £151.20 a week – it will be at least £151.25 at the full rate from April 2016. ,

Part of the extra cost of uprating the Pension Credit Guarantee level will be recouped from pensioners with savings, as the Savings Credit threshold will be increased by 5.1%, so the poorest pensioners who have some savings will lose out on some extra income.  Savings credit gives extra money to people who have saved, but you only receive this credit if your income is above the Savings Credit threshold of £120.35 a week for a single person).  The Savings Credit threshold will be increased by 5.1%, so more people will fall below the new threshold and lose out on savings credit income.  For every £1 by which your income exceeds the threshold, the Government pays you 60p, but this is one of the most complex calculations and most people simply do not understand it.  The maximum savings credit anyone can get is £16-80 a week and many of those entitled never actually claim because it is so complicated.  Nevertheless, some people will lose out when the Savings Credit is increased.

Stamp Duty reform

This is great news for most housebuyers.  98% of home buyers will pay lower stamp duty as a result of the reforms that have been announced.  Many older people have houses larger than they really need, but the costs of moving have put them off downsizing.  The reform of stamp duty should help free up more movement in the housing market.  There also needs to be a construction programme to build homes that older people might want to aspire to downsize to, which will further help them move on to more suitable housing.

Stamp duty has long been a most unfair tax. This ‘slab’ tax creates distortions around the threshold levels and reform has been long overdue – under the current system imposes, tax is paid on the whole property value, not just the marginal extra slice as with income tax at the rates shown in the table below. As an example of the unfairness, if you buy a home worth just under £250,000 you pay 1% tax, or £2,500.  But if you buy a home for £251,000, then you pay 3% which is £7,530.  This creates significant distortions around the tax rate thresholds which interfere with a free market.

Current Stamp Duty Tax Rates

Up to £125000 no stamp duty

to 250,000                   1%

to £500,000                 3%

to £1m                         4%

to £2m                         5%

>£2m                           7%

Scotland has already decided to change its own stamp duty rules from next April.  The Scottish Parliament wants the most expensive homes to bear a higher burden of the tax, and now the Chancellor is following Scotland’s lead.  Scotland’s measures have zero stamp duty on the first £135,000, then 2% duty on the extra up to £250,000, 10% on the amount between £250,000 up to £1m and 12% on the balance over £1m.  The Treasury has used different rates and thresholds, but the same principle as Scotland, so the new system will have the following rates.

New Stamp Duty system

Up to £125000                       0

£125,001 – 250,001                 2%

£250,001 – £925,000               5%

£925,001- £1.5m                     10%

>£1.5m                                    12%

Under the new rules, someone buying a house worth £251,000 will pay £2520 in stamp duty (rather than the £7530 under the old system.).  Those who have already exchanged contracts but not completed will be able to choose whether to use the old or new tax systems.

What’s still missing?

Measures to incentivise employers to train and employ older people

The Chancellor has, quite understandably, focussed on getting young people into work and subsidised apprenticeships.  Paying employers to take on young people is obviously beneficial, but has had the knock on effect of stopping employers from taking on older people as apprentices.  The over 50s are the group most likely to be long-term unemployed and need urgent help to get back into work.  The two biggest problems they face are ageism at work and lack of skills – these two factors combine to product a loss of confidence.  The Chancellor has promised (see page 89 of the Green Book) that from April 2015 there will be some back to work support for older people, with the Government piloting career change work experience and training schemes for older benefit claimants who are out of work.  This could help them achieve the training and experience they need to re-skill and move back into work.  I would like to see the Government go much further than this and fund proper over 50s training schemes.  It is so important to help the unemployed over50s find work.  We have had tremendous success in reducing unemployment for younger people, which has rightly been a significant policy focus, however there are serious problems for older people who face age discrimination in the labour market.

By ensuring more older people find work, the long-term growth of the economy will be boosted.  In our aging population, with so many more over 50s in coming years, failing to ensure as many as possible can find work is a recipe for economic decline and a real waste of talent.  I am so pleased that the Government has understood the need to intervene to help overcome the problems faced by older jobseekers.  Having met a number of out-of-work older people recently, I hear time and again that they feel they are not taken seriously when looking for work.  They lack up to date skills and experience, but having a chance of training and work experience gives them the opportunity to show what they can do.  Rather than being written off as ‘too old’ or ‘past it’, these new initiatives can help restore their confidence and self-esteem by moving back into work.

We need to do more to ensure older people’s skills are kept up to date, they have the chance to change careers if necessary, they can combine work with caring responsibilities and return to work after caring if they wish to.  Flexible working and even apprenticeships, returnships or mentoring are all important to help the employment prospects for over 50s.  Just one year delay in average retirement age can add 1% to economic growth and will increase lifetime incomes and national spending.

Specific incentives to save for social care

The Chancellor has not yet announced specific new incentives to help people save for later life care.  The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this.  A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care if needed and, if the ISA could be passed on free of Inheritance Tax if not spent on care, then many people might start earmarking their ISA savings for care.  The new pension freedoms can also encourage people to leave money in their pension funds to pay for care in later life, however further incentives may also be necessary.  A specific tax break for care savings would help focus people’s attention on this vital issue.

Pensioner Bonds – what interest rate? We will know on 12 December

The Government says it will announce the interest rates for the new Pensioner bonds on 12 December 2014.  It has promised two different fixed rate market leading interest rate bonds to be available to people over age 65 from January 2015.  The original announcement was for each person to be able to buy up to £10,000 of a 2 year and a 5 year bond with interest rates of 2.8% or 4% respectively – let’s hope those plans haven’t changed.

Incentives for pension funds to invest in infrastructure

I am hoping that, sooner or later, the Government will wake up to the power of pension funds to invest in productive projects that can both help the economy and improve scheme funding. Infrastructure is an ideal asset to add to pension portfolios, as they offer the benefit of diversification which can reduce risk and potential inflation linked long term income streams.  If the Government were to underpin such investments, perhaps investments it would otherwise undertake itself by borrowing in the gilt market, then it could avoid worsening the deficit by only having to pay if the pension fund did not make sufficient returns to exceed gilt yields.  By offering at least gilt yields as a contingent payment in the event that a new infrastructure project did not deliver better returns in, say, 5 or 10 years’ time, the Chancellor could save the initial outlay and may never have to fund the project, but the economy would benefit from job creation in the meantime.  And if the project did succeed, the improved infrastructure would provide additional economic benefits and the funding of UK pensions would improve.  Offering meaningful incentives to UK pension funds to encourage them to use their assets to take construction risk on infrastructure projects, organised by trusted third parties, could boost the UK economy but the Pensions Infrastructure Project that was set up does not have such incentives in place.  That has failed to attract sufficient funding and has focussed on investing in existing projects or infrastructure secondary market debt, which does not have the same economic benefits or potential rewards as new projects.  Obviously these investments do carry greater risk, which is why a Government underpin that promises at least gilt yield returns if projects do not perform well enough could attract more money.  That way, the taxpayer would not need to commit money upfront while the public finances are so stretched, but domestic savings could be used to boost both the economy and pension fund returns.

Guaranteed Guidance for pension savers– what will the brand name be?

We need to know what the name of the guidance will be.  It is supposed to help individuals with their pension decisions and guide them to the information they need to assess what they should do.  The government must now urgently start to promote this service, to build up a strong brand recognition.  The more people who take up the guidance, the more likely they are to understand the important issues they need to consider when reaching their scheme pension age.  It will be very important to explain that this is not ‘advice’ and those giving the information are ‘Guides’ not ‘Advisers’.  If people want individual, tailored expert help to know what is the best decision for their own circumstances, and someone to take responsibility for it, they need to pay for independent financial advice.

Force pension companies to treat annuity customers fairly – reform sales process

It is disappointing that we did not see any new measures to reform the annuity market.  There are many ways in which the annuity sales process is failing to ensure customers are treated fairly by their providers.  Reforms are urgently required to revamp the way annuities are sold, including the following measures:

  • Introduce standard forms written in plain English, to explain annuity products
  • Providers must ask basic questions to establish suitability before selling an annuity.  For example, if the annuity assumes the customer is in good health, then this must be made clear and the company must ask about their health
  • Providers must explain the risks of annuities – for example that there is no inflation protection and no partner’s pension if the customer dies early
  • The FCA should ban hidden commission and require anyone selling or facilitating annuity sales to declare upfront how much money the customer will pay if buying an annuity and whether independent advice is being given.

December 3, 2014   2 Comments