It’s that time of year again... not for planning Christmas parties (although someone in your organisation will no doubt be doing that, too) but for speculating about what will and won’t be in the Autumn Budget. With COP26 starting days after the Budget, Rishi Sunak’s sack is unlikely to contain coal for the pensions industry, but what could he have in store? 

   

The chancellor certainly has quite a job on his hands to keep the economy going amid a pandemic – which NHS bosses have warned could cause winter havoc if no extra measures are introduced – while limiting already ballooning government debt. And then there is of course the matter underlying everything: getting re-elected, and, dare I say it, preparing the ground for a leadership bid a few years down the road.  

   

With challenges like Covid-19 and finding money for the green transition, pensions may not be high on the list, or will they? They could be, but if they are it might be from an investment more than a tax perspective. 

 

  

A plan for a Long-Term Asset Fund – a new open-ended fund for illiquids that is meant to facilitate pensions money flowing into UK infrastructure and venture capital – was announced earlier this year, with the Financial Conduct Authority issuing a consultation in May. Budget day might provide a stage for the chancellor to declare that they are coming online, said Laith Khalaf, head of investment analysis at retail platform AJ Bell.  

   

“The chancellor has no doubt eyed the huge sums of money sitting in pension funds and decided that would make a rather nice funding pool for infrastructure projects and private British companies,” said Khalaf.  

 

“He’s not wrong on that score, but the challenges in bringing such a product to market are not inconsiderable, and the benefit to end investors is theoretical and unclear. The main issue with investing in illiquid assets is - drum roll - they aren’t very liquid. The fudge coming down the road is allowing long notice periods for LTAFs, possibly longer than six months, rather than standard daily dealing,” he said.  

   

This would shift the liquidity problem onto the DC default funds that are expected to invest in these products, he said. A few percentage points of illiquid assets should not present a problem for diversified funds like defaults, he said, but warned that extensive liquidity risk management would be necessary. 

“Applying such risk management techniques to a newly created fund class also presents challenges, and some multi-asset managers may well prefer not to allocate some of their capital to funds they can’t get their hands on for the best part of a year, and then at an unknown price,” Khalaf noted.  

   

 

As for other pension saving matters, pressure is growing from the industry to see the implementation of auto-enrolment reforms – promised after the 2017 Auto-Enrolment Review – which the government had said it would bring forward in the ‘mid-2020s’. They include lowering the age threshold for auto-enrolment to 18 from currently 22, and scrapping the earnings threshold, meaning savers would contribute from the first pound earned.  

 

The Investing and Saving Alliance is calling on the government to put the agreed outcomes for auto-enrolment into legislation “so that young people can start saving earlier and to ensure low earners are not disproportionately impacted by the lower earnings band”, it said. 

   

Early years of contributions are the most valuable, noted master trust Now Pensions, because they mean that savers benefit from more years of compound interest growth. It also said that financial pressures are lower between 18 and 22 as people do not tend to have mortgages or children at that age.    

The master trust agrees with lowering the age threshold and will “continue its work with policymakers and the AE industry to implement this measure at the appropriate time to ensure everyone has an equal opportunity to save for their futures and build an adequate savings pot for later in life”.  

  

However, with the economy still recovering from the pandemic and adjusting to the new normal, putting extra costs on employers seems like an unlikely prospect now, especially as ‘the mid-2020s' are still a few years away. 

 

  

Now’s main concern is not auto-enrolment reform but the so-called net pay anomaly, whereby low earners in net pay schemes lose out on tax relief, an issue which the government has so far left unaddressed.

Now’s director of policy, Adrian Boulding, said: “Now Pensions is calling for the government to take action at the Autumn budget to ensure everyone has an equal opportunity to save for their futures.”  

   

   

Looking at pensions tax relief might be as interesting as a wet sponge, but here we are again. Flat rate relief is unlikely to feature in the Budget – for the reason that it would mostly hit a demographic which makes up a big part of the Conservative supporter base. Yes, in March the Telegraph reported that the Treasury was considering flat rate relief ahead of a tax announcement, but this did not manifest on the day and looks like a classic exercise of, ‘Look what we could be doing to you’, followed by, ‘We chose not to do it – aren’t we great?’. 

 

    

AJ Bell’s head of retirement policy, Tom Selby, said removing higher-rate relief would be “a direct attack on middle Britain, leading to people who do the right thing and save for their future being hit with extra tax costs”. 

 

He also pointed out that it was not clear how flat rate tax relief would be applied to defined benefit schemes, where contributions come from pre-tax net pay. 

  

“Any solution would inevitably see members of public sector DB [schemes] – including doctors and NHS workers who were clapped as heroes during the pandemic – landed with significant tax bills as well,” he noted.  

 
A list of tax reliefs with their objectives is still due to be published by HMRC – and expected this autumn – after the Public Accounts Committee said tax reliefs and their impact were poorly understood. It might just be that the Treasury is waiting to receive the list before looking at tax reliefs more closely. 

 

Selby argued that the annual allowance is the simplest lever to pull if the Treasury wanted to save money on tax relief. The annual allowance is currently set at £40,000. 

  

“Lowering this to £30,000 or even £20,000 – in line with the ISA allowance – would raise revenue for the exchequer while only affecting those who make very large pension contributions,” he said. 

  

Ian Neale

 

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