Retirement Income Alliance


by Malcolm Small 26th April 2017

The “snap” general election called for 8th June brings with it the possible prospect of policy changes for pensions. Particularly if the Conservatives emerge with an unassailable majority, the way could be clear to push through some quite radical, and quite possibly unpalatable, re-shaping of the pension landscape. There remains a deficit in the government’s books which means we continue to spend more than is received in tax each month and each year. This means higher borrowing and more to be spent on servicing that debt, a situation described accurately in an Office for Budgetary Responsibility report very recently as “unsustainable”.

The scope for raising additional tax is very limited as we have seen in the failed National Insurance rise proposed for the self-employed in the last Budget, short of actually increasing income tax rates. If this is not possible, costs must be cut and we are seeing the early effects of this in cuts to “care” funding and some impacts on the NHS. There will be more to come. The books must be balanced, and go into surplus.

There may be effects for pensions. The Cridland Report on the state pension age has conveniently for government been caught up in “purdah”, whereby official business comes to a standstill in the run up to the election. A very big Conservative majority would enable quite a bold raising of state pension ages if the Report recommends such an increase, with the betting saying increases will be required. This could reduce the future cost burden on the state although it would have little short-term impact.

Also seen as vulnerable by observers is the “triple lock” on the state pension whereby it increases by the greatest of inflation, the wages index, or 2.5%. Pensioners have in recent years enjoyed real-terms increases in consequence. It has been suggested that the increase could just be pegged to the wages index only and significantly there has been no statement on this from the Conservatives at this time, although it was a Manifesto pledge last time to keep it in place “during the lifetime of this Parliament”. That lifetime has turned out to be shorter than anyone expected.

Those businesses with current, or legacy, Defined Benefit pension schemes are suffering badly from the yawning deficits in these schemes which require crippling additional funding to support. On the upside, we might expect to see the new government put in place easements for employers which, while watering down benefits will make it easier for UK plc to cope with the weight of the financial burden. It is clear the situation here cannot go on as it is.

But the biggest issues are likely to be state pension age and the “triple lock”. Both would directly impact the biggest single voter group in the country – pensioners and prospective retirees. This group votes in large numbers, unlike the young, and any policy changes here would hit this group directly in the pocket. On the other hand, this group also votes overwhelmingly Conservative and is unlikely to be swayed, in most cases, by the recent Labour promise to keep the “triple lock”.

The final area for focus must be tax relief on pension contributions. Limiting the relief to a flat rate, or just basic rate, would go a considerable way to closing the deficit. There is considerable scope for “unintended consequences” in any such move, but it has looked like “low hanging fruit” to me for some years now. Again, any such move would be unpopular in Conservative heartlands. But a big majority for Theresa May could make such a move possible where it wasn’t before.

The 9th of June will be an interesting day.