Emily Rowley, associate director, Sackers asks: The Labour Government has been elected on a ‘change’ manifesto. So what will this mean for pensions policy?
On 4 July 2024, the country ‘chose change’ and Labour formed our new Government.
Many of us are now trying to predict what the next five years could look like for DC pensions. We know that the Government intends to focus on growth in the economy, keeping the books balanced and stability in Government and public services without increasing any of the major taxes. But, how could this relate to DC pensions?
Growth
Statements from Labour indicate that it is likely to press ahead with the Mansion House reforms from July 2023. In particular, the Government supports an increase in pension investment in
UK businesses.
But it is not clear how this would be introduced legally; whether pension schemes will be asked to disclose a percentage of assets invested in UK industries, or if there will be a huge shake-up to established trustee duties on freedom of investment.
It also seems likely we will see a response to the consultations on unlocking DB surpluses as well as decumulation, favouring more flexible use of pensions in retirement and enabling greater investment innovation.
A relaxation of the laws around the use of DB surplus funds could also support a path to economic growth by, for example, making it easier to return this to employers or supporting the use of DB surpluses to fund DC contributions.
Keeping the books balanced
Our new Government should be aware of the looming pensions problem. With an ageing population, the triple-locked state pension is a very expensive benefit. But, with the move away from DB to DC, we have a generation of savers who will be solely reliant on what are generally much less valuable DC pots to fund their retirement.
Possible options for the Government include, removing the triple lock (the manifesto did not commit to its retention for a particular period), increasing employer contributions and ensuring support with DC decumulation maximises retirement outcomes.
We’re also likely to see changes to the scope of auto-enrolment, both in terms of age bands, as well as income thresholds, in order to increase the numbers in pension saving. Labour’s proposed ban on zero hours contracts may also have knock-on implications for businesses’ auto-enrolment obligations.
Pensions tax
Labour has publicly stated that it will not reintroduce the lifetime allowance. But changes to other aspects of pensions taxation are likely to feature as they are a relatively easy way to raise revenue in an area that often is subject to less scrutiny than other taxes by voters and the press.
Possible targets could include the tax treatment of lump sum death benefits, as these typically are paid in a manner that does not make them subject to IHT.
Although, during the General Election campaign, Labour stated that it had “no plans to change pension tax relief”, a true shake up would be a move from our EET (exempt, exempt, taxed) to a TEE (taxed, exempt, exempt) approach. High earners who pay over 20 per cent income tax receive tax relief at their marginal rate (up to 45 per cent) on pension contributions but are able to stagger their income in retirement to avoid paying a higher income tax charge. This would be a way to raise additional revenue, which would only impact higher-rate taxpayers directly.
Stability in Government and public services
In recent years we’ve seen TPR and the FCA work ever more closely together on DC matters. This doesn’t look set to change and a joined-up approach from both regulators on any outcomes of the Mansion House reforms is desirable, for example on implementing decumulation approaches.
To encourage people to save into pensions earlier and improve engagement, we could see a change in proposals on financial education, in schools and beyond, to improve understanding of this complex system. Perhaps the launch of the pensions dashboard would be a good time to start a new pensions education campaign.
The Government has confirmed a pension review is on the horizon. So looking ahead
one thing seems clear: it is also time for pensions to ‘change’.