Regime change effects
UK pension funds, consultants and asset managers had been hoping for some form of political certainty ever since the run-up to the general election in May. The outgoing Labour government had set in train a number of pension reform measures, including the launch of its National Employment Savings Trust (NEST) in 2012, designed to sweep up UK workers with no existing pension provision through new auto-enrolment regulations.
The election may be over but the pensions industry has been left facing even more uncertainty as it comes to terms with the implications of a hung parliament, with no one political party enjoying a majority. The Conservatives, who were tipped by many to be favourites to win the election, promised a number of pension-related measures and said they would undertake a thorough review of NEST in its current form should they come to power, meaning the introduction of the national scheme was never a foregone conclusion.
However, now the Tories are relying on support from the Liberal Democrat party to give them a ruling majority, any genuine intentions to overhaul Labour’s plans will be that much harder. It will be difficult for a coalition government to pass measures and change laws generally due to the UK’s well-established political tradition of one-party majorities.
This uncertainty was made all the more murky when the Conservatives’ shadow pensions minister Nigel Waterson lost his seat, having been voted out by his constituents in favour of Lib Dem Stephen Lloyd. At the time, pensions adviser and campaigner Ros Altmann publicly bemoaned the loss of “one of the few politicians who understands pensions”.
Many expected Waterson to be succeeded by Conservative MP David Willets, who famously criticised the post-war ‘baby boomer’ generation - currently in or soon to enter retirement - of effectively stealing their children’s financial future in his book, The Pinch. To the surprise of the industry, the role of pensions minister has been given to Lib Dem MP Steve Webb, while the Conservatives’ Iain Duncan Smith has been appointed secretary of state for work and pensions. The former will have more power, suggesting the future of UK pensions could become wrought very much in a Lib Dem mould.
There was always the chance that pensions remained towards the bottom of the political agenda during the first few months of the new coalition government’s tenure, but this is now unlikely. This means Labour’s NEST scheme may not simply sneak through unaltered due to a lack of attention and interference, as coalition politicians wrangle over more pressing issues.
Altmann took some solace from Webb’s appointment, describing it as a “great choice” and providing some “real hope of remedying the dreadful damage of the past 13 years”.
An obvious upshot of Webb’s appointment could be further reductions in pensions tax relief for high earners - or it could be scrapped entirely. It could also lead to a review of Labour’s NEST scheme with Duncan Smith and Webb overseeing the introduction of the scheme and the implementation of auto-enrolment regulations.
Another area of potential reform likely to gain traction is the public pension system. The UK government, whatever its constituent parts, will be faced with the task of reducing its budget deficit. Reforming public pensions might be one of the easier ways to work towards this, especially given public notions of inequality between public and private sector pensions. Unfunded public sector pensions, such as those for police and National Health Service employees, are estimated to have built up a £1trn deficit. This is likely to be an important political issue in an environment of fiscal belt tightening. The CBI employers’ association recently published a report on how public sector schemes could convert to so-called notional defined contribution schemes, as a way of addressing the ballooning state-backed pension promises, in a similar vein to those in countries like Sweden.
In its coalition agreement, the government stated it would establish an independent commission to review the long-term affordability of public sector pensions, while protecting accrued rights. It will also link the state pension to earnings from April 2011 with a “triple guarantee” that pensions are raised by the higher of earnings, prices or 2.5%. The coalition agreement also set out the government’s intentions to phase out the default retirement age and hold a review to establish the date at which the state pension age starts to rise to 66.