Matthew Arends: Now may be the time when a new government could or should go down a more radical path
Famously, the late Frank Field was appointed by Tony Blair to ‘think the unthinkable’ on welfare reform. Ultimately, his ideas were generally dismissed but what comes from following the path of off-the-wall thinking when deciding what to prioritise for change in pensions?
Tax relief
With apparent clarity now that the lifetime allowance is gone for good, but also that pension commencement lump sums will diminish in importance as inflation has its effect, the next place to turn to is income tax relief on pension contributions. What if relief is given only at the basic rate for all savers, not at the individual's marginal rate? That would save approximately £13bn a year in tax relief, all else being equal. Let's assume, though, that this change causes some to opt-out of pensions saving, so that the direct saving in income tax relief on pension contributions would be
£10 billion a year.
A national wealth fund
What if that money is invested in a new national wealth fund rather than spent? The fund could be expected to grow almost twice as fast as NEST (annual contributions of £6bn), reaching over
£50bn in five years. That would provide a platform for investment in the UK, whether that is via equities, infrastructure or other assets - something that both the Conservative and Labour parties seem keen to cultivate. Further, the annual returns alone on the fund, once it is at scale, become measurable in billions of pounds – which could be used to fund public expenditure.
State pension reform
To become even more radically-minded, if a future government were so inclined, the national wealth fund could become the starting point to begin conversion of the state pension from pay-as-you-go, to funded. That might reduce some of the pressures of an ageing population by reducing reliance on raising tax revenues from a declining younger population, to pay the state pensions of a growing retired population.
Overcoming challenges
Such unorthodox thinking is not without its challenges. How, for example, should defined benefit (DB) accrual be assessed for basic rate tax relief in a way that is reasonably fair compared to defined contribution accrual? We currently have the multiplier of 16 times for assessing DB accrual against the annual allowance – but that is a blunt tool. It would be a small step, though, to extend that approach to an age-related multiplier which would better reflect the much higher value of accrual to older members than younger ones.
Why ‘unthinkable thinking' is needed
Of course, these are all deliberately ‘pie-in-the-sky' ideas which I, for one, do not expect to see happen. But maybe it is this kind of ‘unthinkable thinking' that we need if we are to make real and workable changes to the UK's provision of pensions and benefits. Now may be the time when a new government could or should go down this path if it is to if it is to deliver a consistent and reliable state pension and support wider aims in the economy.
Matthew Arends is a partner and head of UK retirement policy at Aon
This article comes as part of Professional Pensions' PP Pensions Commission – which is looking to bring together industry opinion and ideas on the future of pensions ahead of the general election on 4 July.
Send your thoughts and ideas to the PP Pensions Commission via email to [email protected]
