Will the 'political earthquake' result in a seismic shift for pensions?

The surprise result of this election was that there was a result.  While David Cameron had – publicly at least – been confident his party could win a majority, many doubted him.  Like Paddy Ashdown, the pollsters are left eating their hats.  Now unfettered by the Liberal Democrats, the Conservatives can shape pension legislation however they wish.

Big shoes to fill for a new Pensions Minister

One of the biggest shocks was the loss of former pensions minister Steve Webb in his Thornbury and Yate constituency. This had been thought to be one of the safest Liberal Democrat seats. Tributes to Mr Webb and his achievements are flooding in from the pensions industry. Whether people agreed with his policies or not, he worked hard to make them succeed and his vision and understanding will be missed.

It’s not just Webb who was ousted. Former shadow pensions minister Gregg McClymont was unseated, as was Dame Anne Begg, chair of the Work and Pensions House of Commons Committee. That’s some serious brain drain on the pensions side. There has been speculation that Steve Webb could be booted upstairs to the House of Lords to carry on as Pensions Minister, if he has any interest in continuing in the role. Certainly this would bring some welcome stability and reduce the risk of a string of new ministers making short-termist decisions.

Another name being bandied around for the role is David Gauke, previously Financial Secretary to the Treasury. This, and the Conservative majority, might help to ensure more consistency between the Treasury and the Department for Work and Pensions. It would give the Government a chance to do some real joined-up thinking.

David Cameron has previously announced that he intends to make older workers champion Ros Altmann a peer. He would give Ros the new position of minister with responsibility for financial consumer protection and financial education. There will be some overlap here with the pensions minister role and some have suggested that her role could be expanded to encompass both.

Juggling policies

Steve Webb and George Osborne have left several balls in the air for the next pensions minister to catch. Pensions tax relief was on nearly every party’s agenda. Mr Webb was one of the few who favoured a simple flat rate of tax relief on pension contributions. The Conservatives have plumped for tapering the amount of tax relief people can get if they earn over £150,000. While at first glance it may seem hard to understand how this policy could affect modest earners, successive cuts risk disenfranchising the bosses who decide what pension provision to make for their employees.

Further, the Government’s willingness to tinker with tax relief is beginning to seriously undermine peoples’ ability to plan for their retirement. At a time when we are all being told we need to save more for retirement, the threat of further changes to the tax relief on pension contributions risks giving a mixed message.

Auto-enrolment is now well under way, and for the most part, seems to be getting Britain saving for retirement. But that’s only the start. Mr Webb recognised that the minimum contributions under auto-enrolment will be unlikely to provide a sufficient income in retirement. He wanted to look at ways of increasing contributions, such as automatic escalation – under which an employee’s contributions increase as their salary increases, so they don’t notice a cut in take-home pay.

It will be interesting to see how the new Government takes auto-enrolment forward. Further work on governance and charging in defined contribution (DC) schemes is probable.

The new pension flexibilities are proving popular for members of DC schemes. As a Conservative-led policy, the Government will want to see them succeed – and indeed, extend them to allow people to sell their annuities. At a time when people will have more options than ever before it is vital that they are able to make informed decisions about their retirement savings. The current framework may need to be bolstered significantly to ensure this happens.

"It will be interesting to see how the new government takes automatic enrolment forward. Further work on governance and charging in defined contribution schemes is probable."

Scottish independence back on the agenda?

While the Conservatives do have a workable majority, the SNP have made massive gains. It is likely they will press for “devolution max”, with Scotland being given full power over its own finances. We may see a move to a federal model for the UK. The SNP may even ask for another referendum on Scottish independence.

For pensions, at the very least this is likely to mean issues arising from differing tax rates across the UK. The state pension will also be high on the SNP’s agenda. They will want to put a brake on increases to the state pension age given lower average life expectancies in Scotland.

The UK’s EU membership is also in question. Cameron has pledged to hold an in/out referendum, likely in 2017. The SNP will seek to ensure that any “out” vote must be backed by all regions of the UK. Were the UK to exit the EU, it would no longer be subject to EU pensions directives – but it is unlikely to be politically palatable to cut back to any meaningful extent on current regulation. Aside from the referendum, it remains to be seen whether/how the Government can renegotiate its relationship with the EU.

“It’s the economy, stupid”

The cornerstone of Cameron’s campaign has been that the economy would do better under a Conservative government than any other. It’s now up to him to prove it. Many employers and pension schemes are struggling in the current challenging conditions. While many are finding ways to cope, a strong economy which boosts asset returns will go a long way to helping those who provide good quality defined benefit schemes – and the rapidly increasing number of individuals saving in defined contribution schemes.