Rachel Reeves at the Resolution Foundation. Photo: Resolution Foundation
Important Labour speech on pensions from Rachel Reeves
Rachel Reeves made some welcome policy announcements in her speech to the Resolution Foundation this morning. I took away three issues as the important announcements:
- lowering the earnings trigger for auto-enrolment
- support for target/collective DC pensions
- a commission to draw up proposals for the post-Budget landscape
the earnings trigger
Under auto-enrolment your minimum pensions contributions are calculated on a band of earnings (currently between £5,772 and £41,865). Originally anyone earning over the bottom of the earnings band was to be automatically enrolled into a pension, but this government introduced a new figure – the earnings trigger.
This is the level you need to earn before you are automatically enrolled. There is a case for having a somewhat higher figure than the bottom of the earnings band. Under the original proposal if you earned a pound more than the bottom of the earnings band you would end up with a tiny pension contribution – as your contribution would be calculated only on that pound. A better solution would be to make the employer pay their contribution from the first pound of earnings as this would also remove incentives to employ people below the lower earnings band, but if this is not on the agenda a “de minimis” provision to guard against tiny contributions that would not pay the cost of collecting them is not objectionable in principle even if the simplicity of the original proposal still makes more sense to me.
But the coalition decided to link the earnings trigger to the personal tax allowance rather than at a simple de minimis level, such as £1,000 more than the lower earnings band. Whether or not you think raising the personal tax allowance is a good thing or not, it is a flagship Lib Dem policy that has been pursued by the coalition and has now gone up to £10,000. This means that the 1.5 million people – 70% of them women – who earn above the lower earnings band but below the £10,000 trigger miss out. One in four working women now earn less than the earnings trigger.
Rachel Reeves is therefore right to say that the trigger should be reduced to the bottom of the earnings band (also the National Insurance threshold) at £5,772 This will end the stealthy removal of a significant group of workers, mainly women, from pensions savings every year.
There is a small cost as there will be extra tax relief to pay – estimated at £20 million. This can easily be found – even if a wholesale shake-up of pensions tax relief would be even better.
The government’s response has been extraordinarily over the top given this is a relatively modest – if very welcome – tweak.
Here’s Iain Duncan Smith:
This is yet another unfunded promise that would mean more spending, more borrowing and more taxes. It would hit businesses with higher costs and more red tape, and ultimately would put jobs at risk.
It’s the same old Labour.
“We have introduced automatic enrolment to make sure more people save for their retirement – and this year’s Budget announced a radical overhaul of the pension system that will transform the way we save and make it easier for people to save for their future.
“As part of our long-term economic plan, we are backing people who work hard and want to build up financial security for themselves and their families. Labour would put this all at risk.”
and Steve Webb:
Labour’s plans are an absurdity that would bring the whole scheme into disrepute.
“At a time when we need to focus our efforts on improving people’s skills and prospects to boost their incomes, Labour’s plans would see the take-home pay of people already on the lowest wages take a damaging hit, all in the name of ‘subsidising’ a state pension already set higher than their current earnings.
“The New State Pension, introduced for new pensioners from 2016, will see everyone who has worked and paid all their National Insurance contributions receive a guaranteed weekly payment set above the means test.
“Anyone earning over GBP5,800 can still opt into a workplace pension if they wish – but for many people on the lowest incomes it will not be the right option for them. Automatically enrolling such people when we know that to be the case would be totally irresponsible and make no sense.”
It was good to hear a strong endorsement of what are fast becoming known as target pensions (explained here) though known to pension geeks as CDC or collective DC pensions. We understand that the Queen’s Speech will clear away the legal obstacles (there is still some consensus on pensions!).
But the real challenge is getting mass take up of target pensions. Allowing employers to set them up if they wish is a good thing, but it does not mean that they will go mainstream. CDC does not require employer underwriting of risk so there is no reason why we cannot expect mass auto-enrolment pensions to work on this model and we need to think about how we spread the potential benefits (as much as 30 per cent more pension for the same contribution according to the RSA).
I am a joint signatory of a letter in the Times today in praise of CDC. (text here)
a new pensions commission
Potentially the most significant announcement today was the establishment of a new Pensions Commission to look at pensions in the wake of the Budget changes. It is to be chaired by Professor David Blake of Cass Business School – an excellent choice.
I have written at length on why I think the Budget pensions proposals were badly thought through and cheap politics rather than sensible public policy development. My sense is that rather more people agree with me than have been prepared to say so in public.
What the Chancellor did is destroy a dysfunctional system without putting anything in its place. This Commission has the potential to be the driving force for delivering a consumer friendly, good value way for people to turn the savings they make while earning into a predictable income when they retire – which is what the vast majority of people expect a pensions system to deliver.