Are they coming for private sector pensions next?
Ministers are shortly to announce the terms of their review of the 2012 pensions settlement. I am one of the consumer representatives who have signed a letter to ministers warning that this could seriously damage a hard-won consensus for change.
Non-pensions anoraks may welcome some background here. The last Labour government set up the Pensions Commission, chaired by Lord Turner, after a campaign by unions and many others, which had to overcome Treasury opposition.
It made a series of recommendations – one of which, relinking the state retirement pension to the higher of earnings or prices – was confirmed in yesterday’s budget, and is undoubtedly progressive (whatever that word now means!).
To boost workplace pensions in the private sector it made some radical suggestions based on the idea of auto-enrolment.
The previous government accepted these, and went on an extensive consensus building exercise to work out the practical details, most of which remained very close to those in the Turner Commission. Despite some heavy lobbying on some detail this was a successful though far from easy exercise. In the end the broad settlement had support that went across the parties, and included employers, unions and the industry (though perhaps with more enthusaism from some than others.) Achieving that consensus was not always easy. Everyone involved had to make some compromises.
So what are the elements of this consensus, bequeathed to the new government?
The most important element is auto-enrolment. From 2012 employers will start to be required to enrol their staff in a suitable pension and make contributions. Employees can opt-out, thus freeing their boss from paying up, but if they stay in the scheme they also have to contribute.
Contributions are paid on a band of earnings – which will be roughly £5,000 to £35,000. The employee will pay 4 per cent, the employer 3 per cent and the state will pay 1 per cent in the form of tax relief. Those who earn less than £5,000 will not be auto-enrolled.
To make this work a new low cost pension scheme is to be created called NEST. This has a public service obligation to accept all employers who do not have an alternative scheme. It has the mission of providing pensions to low and moderate earners who have not been served well by the existing industry.
This is all to be the subject of a review, and reports suggest that the details of this will be made public this week.
No-one can object to a new government wanting to examine the decisions of its predecessor – even in an area where there were real efforts to involve the then opposition parties. NEST has signed a contract for its administration with a break point in October, deliberately inserted to allow a new government to make changes.
The coalition agreement commits the parties to auto-enrolment, carrying forward the policies the parties had in opposition.
So the review could end up being a relatively limited affair looking at NEST’s commercial plans, but as the consumer letter argues, if it goes much wider than this it could break up the consensus and derail plans that would undoubtedly get millions of extra people saving for their pension.
And indeed there are worrying signs that the review could go wider and include the earnings band limits, whether NEST should exist at all and who should be auto-enrolled with a suggestion from new minister Lord Freud that small firms should be excluded.
The letter goes through the dangers of a wider review so I won’t repeat the points here.
But there are two I would like to emphasise.
First if the employees of small firms are excluded, it is hard to see the 2012 reform acting as a fundamental change to the pensions system. A significant proportion of the workforce work in small firms and if they are not part of auto-enrolment then the country’s pensions system will need to be designed around their needs. This will inevitably involve the state providing more support for them in retirement, presumably through higher taxes.
Secondly if the income limit is raised and NEST abolished, this will leave auto-enrolment as little more than easy marketting for a pensions industry that has a less than illustrious record when it comes to mis-selling. Consumer groups helped argue for an understanding from the EU that auto-enrolment would not fall foul of inertia selling rules. But that is because we saw it as part of a comprehensive new pensions system.
I’m certainly not alleging that this is some kind of done deal. We do not yet know the details of the review or who is going to do it, but it is right to be worried.
Yesterday’s budget did not reassure. One Lib Dem measure that did not survive is the call to limit tax relief on pensions to the basic rate of tax. Given that the Treasury were behind Labour’s regrettable decision to phase in the 2012 reforms over a longer period of time to save money on the extra tax relief payable when millions are auto-enrolled, we should be worried. The obvious source for this extra spending on the pensions of low to middle income people is some further limit on tax relief for the rich- even if not the full LibDem package. My guess is that the Treasury, who never wanted the Turner Commission, may be demanding major surgery on 2012 to preserve tax relief for the rich.