Last week the various UK political parties unveiled their election manifestos outlining their key priorities for the pensions industry, ahead of the general election which is to take place 4 July.
It is widely anticipated that following 14 years of a Conservative government, Labour might take the reins. If elected, Labour has confirmed in its manifesto plans to increase investment from pension funds in UK markets.
It said it will adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers, and for greater productive investment for the UK.
And it will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.
Labour also reiterated its commitment to retaining the triple lock for the state pension.
It said: “Our pensions review will consider what further steps are needed to improve security in retirement, as well as to increase productive investment in the UK economy.”
In its manifesto, Labour also highlighted that the pensions industry has a “major role” to play in mobilising “trillions of pounds” in private capital to address climate change.
Therefore, it said, it will look at mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.
Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said the Labour’s promise to undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes is “positive”.
He said: “We have long argued that automatic enrolment contributions should be increased and that more workers should be included.”
On the plans to examine ways in which pensions can be supported in providing finance to promote UK growth, Peaple added that the association had already set out how the government can best attract pension fund investment via policy, regulation, fiscal incentives and consolidation.
“A key element is for government to establish a pipeline of investible assets, in particular through the mandates given to institutions like the British Business Bank, and through initiatives like the proposed National Wealth Fund,” Peaple said.
“Pension funds already invest £1trn in the UK economy and are open to investing more if the right opportunities are available and they are in the interests of their members,” he added.
Calum Cooper, head of pension policy innovation at Hymans Robertson, said that pension reforms should be led by an independent pensions commission. “This is about delivering later life security for today’s workers and generations to come and not a game of party politics.”
He added that the biggest pension challenge any new government will have is the rapidly emerging pensions division between those generations with defined benefit (DB) and defined cotnribution (DC) pensions.
Cooper said: “DB pensions are likely to provide an adequate pension income, while those with a typical DC pension face a massive inadequacy challenge. This difference between the older and younger generations is quite simply inter-generationally unsustainable and must be addressed.”
He went on: “Issues such as deciding how to use DB surplus, encouraging innovative new pension design for DC – whether that’s CDC or other risk sharing ideas, looking at solving the decumulation puzzle, gradually stepping up auto-enrolment contributions and developing new thinking to help savers navigate from work into retirement safely and successfully need to be addressed.”
He added that it is clear from the scope of the review that the Labour Party wants to increase investment from UK pension funds into UK markets through productive finance. For this to succeed, he said the pensions industry needs a clear articulation of what the government defines as productive finance, with an outline of the practical application.
“With this the pension and financial services industries will then be able to mobilise attention and work on helping this to be effective,” Cooper noted.
Adrian Kennett, director at Dalriada Trustees, expressed concern over certain points missing from the manifesto.
He pointed out that there was “silence” from Labour on the taxation of pensions such as the lifetime allowance, adding that “at some point, the books have to be balanced and people have to pay”.
He also pointed out there were “inescapable problems” that weren’t being talked about, “largely the fact that 8% of earnings through auto-enrolment doesn’t buy you a comfortable retirement”.
In fact, neither Labour nor Conservative manifestos mentioned auto-enrolment despite being highly successful in helping millions of people build up more in workplace pensions and the bill extending the auto-enrolment to those aged 18-21 being granted Royal Assent.
Conservative Party manifesto
There are many other pension initiatives under development by the current government, including the pension dashboards, the value for money framework, a solution to consolidate small pension pots worth under £1,000, extending a new form of collective defined contribution (CDC), and the ‘pot for life’ proposals.
The Conservative Party has focused its manifesto on promising not to introduce any new taxes on pensions.
It said that it will “continue to do everything we can” to provide pensioners with “dignity” in retirement and ensure the new State Pension is not dragged into income tax by introducing ‘Triple Lock Plus’, which it explained has two elements: continuing to uprate the State Pension in line with the highest of prices, earnings or 2.5%; and ensuring that from next year the tax free personal allowance for pensioners also rises by the highest of prices, earnings or 2.5%, guaranteeing that the new State Pension is always below the tax-free threshold.
The party also committed to maintaining the 25% tax free lump sum and maintaining the tax relief on pension contributions at their marginal rate. It added it will also not extend National Insurance to employer pension contributions.
Steven Cameron, pensions director at Aegon, said that a number of “important” future pensions developments “don’t get a mention” in the manifesto, including when enhancements to auto-enrolment might be advanced.
He said: “These would open up automatic enrolment into workplace pensions from age 18 rather than 22 and would gradually increase the minimum contributions to 8% of earnings from the first £1, rather than only on earnings above £6,240.”
The frustration was shared by Tim Middleton, director of policy and external affairs at the Pensions Management Institute (PMI), who said it would be “encouraging” if the manifesto included further reforms to auto-enrolment.
He also expressed surprise at the lack of mention of the Lifetime Provider model (or pot for life).
PLSA’s Peaple agreed, adding that “we urgently need a roadmap to gradually increase pension contribution levels from 8% to 12% over the next decade or else many people working today will miss out on a better pension in retirement”.
Green Party manifesto
The Green Party’s manifesto focused on removing fossil fuel assets from financial institutions’ investment portfolios and pension tax relief.
It pointed out that financial services have a “crucial” part to play in achieving a rapid transition to a zero-carbon economy and ensuring that nature is protected.
It said that it wants to make the industry a “force for good” – directing finance towards businesses that are critical to creating a better future for all.
The document added that non-bank financial institutions, such as UK pension funds, investment funds, mutual funds, brokers and insurance companies that sell policies in the UK, will need to remove fossil fuel assets from their investment portfolios, securities transactions and balance sheets by 2030.
The Financial Conduct Authority (FCA) will develop targets to eliminate all equities relating to fossil fuel exploitation from the UK stock market and will immediately prohibit the issuing of any new shares for those purposes, it said.
On tax, it said it would equate the rate of pension tax relief with the basic rate of income tax to help fund the social care that will allow elderly and disabled people on low incomes to “live in dignity”.
However there is little more detail available on the Greens’ plans.
Matthew Downey, investment consultant at Broadstone, noted that the “devil is in the detail”, adding that a policy such as proposed on fossil fuels could have unintended consequences.
“There is demand from the pension industry to decarbonise and engage with companies to improve working practices: if pension schemes are mandated to remove fossil fuel assets, we do worry that these may be bought up by hedge funds and other investors who may not be as interested in how the underlying companies operate,” he said.
“As an asset owner, the ability to engage and influence corporate behaviour is arguably an effective way to implement change”
Matthew Downey, investment consultant at Broadstone
“As an asset owner, the ability to engage and influence corporate behaviour is arguably an effective way to implement change,” Downey continued.
“We would also need to see how the plans for the FCA to stop shares relating to fossil fuel exploitation are implemented. As the manifesto stands, the wording does not prohibit debt financing so there are potential loopholes which could be exploited. That said, supermarkets make money by selling fuel, banks may finance oil and gas firms, and there is even an airline in the FTSE 100, so depending on how the targets are set, they could have a significant impact on the UK stock market,” he warned.
Lib Dem Party manifesto
The Liberal Democrats’ manifesto also focused on climate change.
As part of its plans to “restore the UK’s role as a global leader on climate change”, it said it would regulate financial services to encourage climate-friendly investments, including requiring pension funds and managers to show that their portfolio investments are consistent with the Paris Agreement.
The plans also include creating new powers for regulators to act if banks and other investors are not managing climate risks properly.
Apart from climate change, the party said it wants to “give everyone the chance to enjoy a decent retirement”. This includes developing measures to end the gender pension gap in private pensions and ensure working-age carers can save properly for retirement.
It also wants to review rules concerning pensions so that those in the gig economy don’t lose out, and portability between roles is protected.
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