There is a hidden scandal brewing at the heart of our pension system – and it threatens to undo all the good work of auto-enrolment.
I am almost too nervous to write about it, because I do not want to destroy the excellent progress that has been made in getting 9m new people into a pension scheme.
I know that this is a similar concern for all those quietly and diligently working behind the scenes to get this issue corrected. But unless those in the industry are talking about it, then no one outside will.
It is to do with net pay company pensions. To Joe Bloggs, that is a pretty dull issue. After all, who really cares whether your pension is deducted net of tax, or through relief at source?
Well, the lowest earners do. Those above the auto-enrolment threshold of £10,000, but below the personal income tax threshold of £11,850.
Lawsuits will follow, and the scale of the compensation will become a hefty burden.This tight band of people – upwards of 1.2m – are not getting tax relief on their pension contributions because they are in a net pay scheme.
Instead, they are essentially paying 25 per cent more for their contribution than someone who is a basic rate taxpayer.
It is a social injustice of an almighty scale and – guess what – it affects women the most, because they are most likely to have part-time, low-paying jobs.
Steering clear of it as a gender issue though, this is really about fairness for those hardest up in society.
The problem is growing in scale because of the increase in the personal allowance. With each giveaway from HM Treasury, the band of people affected grows. Many may even have been claiming tax relief before, but now find they are not because they have dropped out of paying income tax altogether.
Come the start of the new tax year, the loss per worker will be £64 a year, or £78m across the nation. That is small fry, and that is why no one really cares. But we should not give in just because the consumer detriment is small per capita.
And this does not just affect low earners. It also hits those on the threshold between basic and higher rate tax, meaning people who may be able to claim a higher rate of tax relief do not.
Who can solve this? My view is that HM Revenue & Customs is duty-bound to come up with a solution. It has the technology and the expertise, and is after all, the organisation responsible for dishing out tax relief.
But it needs a shove from the Treasury. It also need the Pensions Regulator to express concern. It is the body that is supposed to oversee fairness in the pensions industry, but on this subject seems to have washed its hands.
Having given advice to trustees and companies about different schemes for its employees it has now walked away from the issue. Frankly, that is a disgrace.
This stinks, and I can see the endgame. It will not take long for a very bright lawyer to spot that there are a group of employees who have been deprived of their rightful tax relief because a scheme trustee has dumped them in a pension ill-suited to their needs.
Lawsuits will follow, and the scale of the compensation will become a hefty burden.
Better to sort this now, before claims handlers get their way.
Private finance initiatives
You can sense a change coming from insurers. They have realised they have an identity problem.
I wrote a few weeks ago about how investment funds are confronted with the same debate. They need to highlight their value before this bull run ends.
Last week, the big pension companies sat down with Philip Hammond to talk about how all the billions of pounds sitting in institutional funds might be put to better use funding public works.
A government short on cash needs to embrace the insurance and investment industry.
Pension companies should not be ashamed of the role they play here. These types of private finance projects could do wonders for diversified returns in a pension fund.
And you could even dress it up as investment for the social good.
If insurers want to solve their identity crisis, they would do well to show customers how they embrace this kind of opportunity.
People just do nothing
Fund manager A thinks Brexit will be good for income funds. Fund manager B thinks the pound will sink. Hedge fund boss C has made millions already.
So what should the ordinary investor do?
Nothing. We should stop indulging in these short-termist discussions about investment and concentrate on long-term value. No wonder so many investors are turning in to day traders.
James Coney is money editor of the Sunday Times
