When the chancellor rises to deliver his seventh budget on March 16, the world of pensions will collectively hold its breath.
Depending on what George Osborne says, the Budget could signal the end of occupational and retail pensions as they have been understood in the UK for nearly a century.
The story begins two years ago, when the chancellor shocked the insurance sector by ending the requirement of all but the wealthiest individuals to annuitise defined contribution retirement savings pots.
Securing a guaranteed income for life moved, at a stroke, from the centre of public policy to the margins. The government hailed its new approach as “pensions freedom and choice”, giving all savers access to pension savings from the age of 55.
Revolution is an overused and-much abused adjective but it is appropriate in this case. Sales of annuities collapsed. Thus 74,000 annuity contracts were signed in the first quarter of 2014, before the pensions freedoms were announced. But just 12,000 were sold in the second quarter of 2015, when the freedoms went live. Retirees have fled guaranteed income-for-life products.
Historically low gilt yields, as well as the absence of competition in the annuity market, have driven up the price of annuities. Market timing risk is another factor weighing against their purchase. More widely, retirees simply do not like handing over all of their pension pot. Flexibility and retaining ownership of capital looms larger in the consumer’s mind than guarantees.
The implications for the pensions system are profound. Pensions are usually defined in terms of an employer contribution and particularly advantageous tax treatment provided by the state, in return for locking away savings until retirement, at which point they are turned into a regular income stream.
Mr Osborne’s pension freedoms remove the fourth pillar and erode the third. In itself this is not perhaps decisive. After all, there is no obligation to annuitise pensions savings at any point in the life cycle in Australia or the US. As long as employers remain committed to the system, pensions will survive.
But for how much longer? The elephant in the room is the chancellor’s consultation on reforming pension tax relief. The government is floating the possibility of fundamental change. Rather than the generous tax relief on pensions savings as it currently exists, HM Treasury could move the UK to a cheaper and simpler tax treatment, with pensions becoming more like Isas.
No one should be surprised. As the guardian of the public purse, it is hard for government to justify the current generous system of reliefs except as a means to encourage individuals to make greater provision for their own retirement, thus reducing future calls on the state’s resources.
In this respect, the tax relief consultation is a logical corollary of pension freedoms – one which the chancellor is likely to have had in mind when he swept away compulsory annuities in 2014.