The Pensions Management Institute (PMI) reveals findings from a survey conducted with 134 of its members in relation to the Government’s Consultation on ‘Strengthening the incentive to save: a consultation on pensions tax relief’.
Of those questioned, many were opposed to significant further change within the pensions system and are in favour of only making changes to improve what is already in place. Conducted over summer 2015 among the PMI’s members, and representing a cross section of views of the industry’s pension professionals including managers, lawyers, actuaries, consultants and administrators, the survey found strong support for the current system, with 55 percent of members indicating that the tax relief system should not be changed at all.
PMI members are not convinced that there is a link between perceived complexities in the current system of tax relief and public reluctance to save for retirement. Only 1 in 10 (11 percent) felt that the complexity of the current system undermined the individual’s potential to save to a great extent. Almost 1 in 4 (22 percent) felt that any changes to the system would make no difference at all. Kevin LeGrand PMI President said: “The Government’s Consultation on Pension Tax Relief evokes a strong reaction from many people, and this can certainly be said for the members of the PMI who we questioned for this survey. Given that the proposals would represent the most significant change to funded pension schemes in over ninety years, this is to be expected.”
Rather than radical changes, PMI members would rather see what is currently in place simplified, with 52 percent placing importance on using just an Annual Allowance to control tax relief and disapplying the Lifetime Allowance altogether for defined contribution schemes; while 48 percent favoured retaining the EET structure and moving to flat-rate relief. Nearly two thirds (63 percent) of respondents do not believe that a simpler system of granting tax relief to pensions would encourage people to save more for retirement, while three out four (75 percent) feel that an alternative system would not enable people to plan better how they use their savings in retirement.
There is very little enthusiasm for the proposed move to a TEE tax system for pensions. There is almost unanimous agreement that such a system is incompatible with defined benefit provision, and serious concerns were expressed about its impact on defined contribution arrangements. In fact, an overwhelming majority (90 percent) of those questioned want to stick with the EET model for employer pension contributions. In terms of the biggest perceived barriers for introducing new tax systems, 78 percent of respondents highlighted employee resistance, while 83 percent felt that tax harmonisation was key. However, 62 percent do not believe that these obstacles can be overcome. The clear view (59 percent) on how the introduction of TEE could be a success is if it were to be introduced for arrangements set at a future date, whilst the existing basis continued to apply to existing schemes.
When it comes to DC versus DB Pensions, strong views are also evident. There was broad consensus around modification of the existing system rather than the TEE system being introduced. Many argued that for Defined Contribution (DC) arrangements the Lifetime Allowance is essentially redundant and that the Annual Allowance alone is adequate to control savings rates. Correspondingly, many noted that for Defined Benefit (DB) schemes a Lifetime Allowance need only be used. Over 60 percent do not believe that DB pensions should receive favourable treatment.
For DC Pensions specifically, the sweeping changes of auto enrolment and pensions freedoms are held in high regard by PMI members. They believe that in terms of employees planning how to use savings, the pensions freedoms are adequate (51 percent). In terms of encouraging increased saving levels, PMI members feel the focus should be on the continuing use of auto enrolment (73 percent), which many feel is an adequate strategy for improving levels of private pension provision, and also on the use of auto escalation (73 percent).
Kevin LeGrand added: “The clearest message coming through, is that auto enrolment and pensions freedoms have provided a strong base on which to build and the industry would rather work on that than make any further radical changes. Our members feel very strongly that in order to sustain any reform of pension tax relief in the future, that the Government and industry should now focus on working together to ensure consensus on pensions policy and that appropriate financial products exist. While as an educational and qualifications body we don’t have opinions on pension policy as such, we can at least agree with our members that such significant reform requires careful thought before any major changes are implemented.”