Encouraging workers to save into pension schemes ought to be applauded. For decades, the public duly avoided saving due to the fear of pension scams. The government keen to avoid workers retiring and suffering pension poverty reacted by introducing auto-enrolment (AE), the requirement by law for employers to provide a work place pension scheme.
Auto-enrolment has been a huge success. The target to enrol 11m workers in the UK by 2018 is on course, with over 5m workers and their employers already contributing. While the staging dates for large and medium firms have now passed, the task of convincing micro-firms to play by the rules and take AE seriously may prove more difficult.
The Pension Regulator is confident its £8.5m mascot - Workie - will get the message over, together with the rather uninspiring tagline “Don’t ignore the workplace pension”. The message appears rather clumsy, perhaps it is based on research that indicates that is exactly what small firms with staging dates post-2017 will do. Communicating sensibly (without cartoon characters) that two years’ prison time is on offer to those employers who ignore AE and fines of up to £50,000, ought to be sufficient to prod firms into action.
Unfortunately, the AE success story has created a pension tax relief (PTR) nightmare. It may be unfair to suggest that chancellor Osborne failed to undertake some simple maths and calculate the additional PTR he would need to find before introducing AE. Broadly, PTR cost the taxpayer £34bn in 2014. According to the Office of National Statistics, between 2014 and 2015 a further 2m people joined a pension scheme. The latest data from the Pension Regulator suggests that by the end of 2015 over 5m people had been auto-enrolled.
The average cost of PTR is around £3,000 per worker, but this mean is skewed by high earners. It is reasonable to suggest that PTR for the forecast 11m workers being auto-enrolled may cost around £2bn a year, based on the average wage and AE contribution limits.
Regardless of the final PTR bill, to save money, the government has chipped away at the annual allowance, now at £40,000 a year (you are able to carry forward to increase this). The lifetime allowance at £1.25m is being reduced to £1m next year and has been a constant target for reduction. Employees earning over £210,000 will no longer qualify for pension tax relief.
With conceivably £2bn to find, chancellor Osborne is pushing ahead with a multi-billion-pound raid on PTR for high earners. Plans to end higher-rate tax relief look certain to be introduced in the March 2016 budget and a flat rate of 25 per cent for all workers has been mooted. Steve Webb, the former pensions minister, has suggested scrapping the lifetime and annual allowance and introducing a flat rate PTR of 33 per cent, with a 25-year guarantee not to change it again.
The proposed government plans have led to concerns that higher earners (disincentivised by losing PTR) will fail to save enough for retirement. Accusations of penalising the middle classes have come from backbench Tory MPs concerned their core vote and supporters will be hit hardest by any tampering with higher-rate reliefs and the introduction of a flat rate.
The huge cost of PTR would have been planned for prior to 2008, the subsequent austerity measures introduced by the previous coalition and continued by the current government, has made AE unaffordable. Without doubt this £2bn blunder will be paid for by the middle-class pension savers. An egalitarian pension system ought to be the goal of any government, but pensions in the UK have always been about somebody gaining and somebody losing.
Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser
