ACA highlights challenges to Osborne tax relief plans

ACA chairman David Fairs
ACA chairman David Fairs

Schemes’ haemorrhaging of higher rate taxpayers and low support towards and Isa-style retirement saving system highlight fundamental challenges to the Chancellor’s assertion that the pension incentives review must boost pensions savings, a major survey by the Association of Consulting Actuaries has found.

An ACA survey of employer scheme sponsors published today has found that just 13 per cent of employers think a pension Isa model with a top-up from Government during accumulation would boost pension saving. The research found 31 per cent believe the reduction in tax relief and complexities of the regime have caused employees on higher incomes to leave their scheme.

The April 2016 demise of defined benefit scheme contracting-out is also likely to increase the pace of scheme closures to future accrual in the private sector, with many employers postponing the rationalisation of their schemes because of issues like the uncertainty over what the policy on tax relief will be going forward.

The ACA survey of 477 employers sponsoring over 620 schemes found 81 per cent of employers are concerned at the level of pension spending they are incurring, with 43 per cent looking to target 6 per cent or less of payroll on pensions.

It found 20 per cent of employers running defined benefit schemes at present open to future accrual say they will close their scheme following contracting-out ending in April 2016.

A significant 82 per cent of employers expect that by 2020 – just 4 years away – the typical retirement age of employees will be age 66-67.  By 2028, over a third expect the typical age to rise to age 68-69.

And 85 per cent of employers say the Government should set up an Independent Pensions Commission to make periodic recommendations on pension policies to ensure these are cost effective and sustainable for employers, members and Government.

The survey also found 78 per cent of employers would support the Government considering legislation that would make it simpler to automatically convert accrued pension benefits so they can be rationalised and crystallised into a consolidated ‘new’ scheme benefit at ‘fair value’, with 70 per cent of employers either supporting or seeing value in the Government encouraging employers with small defined contribution arrangements to merge into larger multi-employer schemes.

More than two thirds of employers – 69 per cent – say the Government should facilitate and encourage the development of large collective schemes where investment, inflation and longevity risks might be shared between members and employers.

ACA chairman, David Fairs says: “In assessing the challenges ahead, we believe the Government needs to have a joined-up strategy ready to address the potential danger of rising opt-outs as employers – particularly small and micro-employers – and their employees react to the increase in minimum contributions in now April 2018 and 2019.  For the majority of employers this is still shortly after their staging date for auto-enrolment and lands in the middle of sizeable projected increases in the ‘living wage’.  And, importantly, as this report points out, there needs to be a great deal of care taken before further pension tax changes are made – any reform must genuinely simplify the regime for both employers and employees and, above all, must genuinely incentivise pension saving as opposed to simply raising tax revenues.

“Whilst much of the recent debate about pensions has dwelt on legitimate desires to drive down charges and to free-up pension monies by way of the popular ‘freedom and choice’ reforms, our survey points to the greater need that looks to a gradual, but essential increase in minimum pension contributions.  A gradual move up to combined minimum contributions of between 14 and 16 per cent should be the target.  This is needed to ensure that many more retirees save sufficient amounts for both a comfortable retirement income and one where they have real choices to spend some of their accumulated savings as they approach or reach retirement.

“We must have the ambition to ‘pull together’ to convince employers and employees alike to save more to improve retirement incomes, particularly for those in receipt of lower workplace incomes, with the Government reviewing in a joined-up way its pension strategy, spending plans, tax policies and incentives to help make this happen.”