The investment bank favours a move to the pension Isa structure, having costed the four options on the table in the Treasury’s pension incentives consultation. Scenario 1 is maintaining the status quo brings no change. Scenario 2, restricting tax relief to a single rate, raises between £7bn and £9bn. Scenario 3, what it calls ‘Pisa Revolution’, involves shifting future savings to a new pension Isa style product, raising between £12bn and £19bn a year. The fourth option, which it calls ‘Big Bang’ or ‘Pisa Plus’ is the same as scenario 3, but offers incentives to transfer the stock of existing pensions into new Pisa products, thereby bringing forward tax revenues. This could cut UK debt by around £115bn and reduce annual government spending by around £20bn says Morgan Stanley.
It says the reform could raise about 1 per cent of GDP for the government.
While UK insurer stocks would be hit by such a change, wealth managers such as St James’s Place and Hargreaves Lansdown would be boosted, says Morgan Stanley.
A spokesperson for Morgan Stanley says: “We expect change. Radical pension reform should help achieve the government’s fiscal goals. Moreover, it can be presented as improving government support for savings, making it more targeted and visible. And we see broad expert and industry support for reform. Our base case is scenario 3 – ‘Pisa Revolution’, on the grounds it best meets the government’s criteria of incentivising pension saving, simplicity and transparency, allowing individuals to take personal responsibility and improving fiscal outcomes
“We see the decisions on reform of pensions tax relief and November 2015’s Spending Review as the missing pieces in the fiscal picture. Ambitious pension reforms could help finance the circa £11bn further tax cuts promised during the election campaign, and provide upside to GDP growth by taking the edge off the planned sharp 2016-17 fiscal consolidation.
“We see risks for UK insurers as flows move away from incumbents towards wealth managers such as SJP and HL (both rated OW) – for Hargreaves in particular, under our base case scenario, if it can double market share, we see potential for a 6 per cent or more increase in earnings. Under scenario 4, we see the risk of modest outflows from insurers’ back books.”
