Leader – High stakes for Osborne and pensions industry

The Chancellor has a historic call to make on pensions tax relief

While it is among the greenest of green papers, the consultation on restructuring incentives to save in pensions is surely one of the most important Chancellor George Osborne will have to ponder. The stakes could not be higher, for him and for the pensions industry.

Centre for Policy Studies fellow Michael Johnson has offered Osborne an incredibly tempting proposition: switch from EET to TEE and receive a windfall of literally hundreds of billions of pounds. The best scenario from a deficit reduction perspective is that pensions move to TEE by revaluing all the £2tn within them on one day, recouping tax relief given up front – possibly totalling £300bn – and legislating that the relief be given on withdrawal instead.

This would be of course incredibly complicated and would create so many winners and losers that the Government could find itself in court for years.

But those most likely to complain would be corporations, either those funding DB deficits or industry providers about to lose AUM. The public would complain too, but how justifiable would that be? Consider a DC saver approaching retirement with a £100,000 pot – after tax-free cash – plus state pension and other income, taking them over the income tax threshold. If they knew they would be paying 20 per cent tax on withdrawals, would they be that upset at the thought of having their fund reduced to £80,000 overnight, in return for being able to withdraw it tax-free?

For the Chancellor, that £20,000 becomes a bird in the hand he can put towards reducing the country’s colossal debt mountain.

Cynics and realists would question the likelihood of the same money being taxed again further down the line, ultimately ending up with a TET system. The Chancellor could get round this one by adopting a completely libertarian stance by not only switching to an Isa-like TEE structure but also allowing Isa-like access. That is surely a harder call – destroying retirement saving and replacing it with any time of life saving feels like a high price to get your hands on £300 billion. It all depends how desperate he is feeling.

For parts of the pensions industry a move to TEE would be a very painful blow. At the extreme end of these proposals, we could see the effective abolition of pensions altogether. What’s more, the reduction in AUM that would flow from such a massive tax take would also hit provider profits.

Rightly, neither of these industy-centric factors will figure in Treasury brains when deciding what is right for the country. But there would be many other complexities to work through.

The extent to which ongoing savings could be made by a switch to TEE would be limited by the monolithic cost of DB, most of which is public sector and which absorbs two-thirds of tax relief. Excluding DB would be unfair, and the Government has sufficient levers in both EET and TEE to get to the outcome it wants, meaning neither is better in revenue-generating terms.

So in the end it comes down to what the Chancellor is prepared to do to get his hands on £300bn – the answer to which is ‘probably quite a lot’.

In Hungary, pension assets have been taken over by the state in recent years. A tax raid on accrued pension assets in the UK would be perceived by many as equally draconian – surely not the behaviour of a Conservative government.

Yet the boost to the Government’s balance sheet would be spectacular. Osborne has a massive call to make on this one.