Written by Jon Dean on Tuesday 22 November 2016
The clocks have gone back, the leaves are turning and we look forward once more to our biannual debate on the future of pension tax relief. This time, MPs and industry figures have been calling for an independent commission to settle the issue and put a halt to speculation for the next 10 years.
I’d argue that a commission purely focused on the structure of tax relief doesn’t go nearly far enough.
We can argue all day about the merits of a flat rate system or, heaven forbid, age-based rebates which would in all probability be both an operational headache and confusing to the public. We might even find evidence that tax relief provides a better incentive to save than nudge- or inertia-based options like the already successful auto-enrolment. But all the while, we would be ignoring the wider issue: the UK pension system is fundamentally broken and far too complex, and successive governments have used it as a cash cow to fund its other, short term political priorities.
For pensions to truly work, they need 4 basic characteristics: sufficiency, sustainability, integrity and intergenerational fairness. The excellent Mercer Melbourne global pension index reports compare the first three factors across 25 different countries; UK provision fell in all three categories this year. The fourth factor, fairness between generations, is becoming increasingly important globally as the dependency ratio is set to rise dramatically. ONS predicts that in the UK, old age dependency, currently around 31%, will increase to 37% by 2040.
Addressing the UK’s retirement savings challenge is going to be a careful balancing act, and needs political consensus to drive through any policy changes. Sufficiency and sustainability demand that we lift the mean average DC pension contribution rate from today’s woefully inadequate 4.7% and address the DB pension funding gap, but not so quickly as to cause recession or company failures. Tax relief is a huge factor in sustainability and must be addressed once and for all. But so too are unfunded public sector and state pensions. Meanwhile, IFS studies on household wealth reveal for the first time an apparent reversal in the trend for each generation to be better off than the last – which has not gone unnoticed by those pushing for removal of the state pension triple-lock guarantee.
The cross-party collaboration that led to auto-enrolment demonstrates that pursuit of the greater good can succeed over partisan politics and short-termism. We need a truly independent pension commission to collate all the evidence and objectively formulate a simple, sustainable system that works for the UK over the long term.