Savings (Government Contributions) Bill

Written evidence submitted by Prospect
(SGCB 03)

Savings (Government Contributions) Bill

Introduction

1. Prospect is a politically independent trade union representing over 112,000 professional, managerial, technical and scientific staff across the private and public sectors. Our members work in a range of jobs in a variety of different areas including in aviation, agriculture, defence, education, energy, environment, heritage, nuclear decommissioning and scientific research.

2. Our evidence to the Bill Committee is focused on the proposed Lifetime ISA (LISA) and the impact this could have on saving for retirement in general and the implementation of auto-enrolment in particular. We have a number of concerns about the introduction of the LISA and have set these out in this submission. Prospect officials would be happy to discuss any of the issues raised in more detail with members of the committee.

Summary Of Prospect’s Position

3. The aim of increasing the level of saving amongst younger people is one that no-one can have any objection to in principle. However the proposed introduction of the LISA raises a number of practical issues and potential unintended consequences. The main problems of concern to Prospect are:

(i) The introduction of the LISA could undermine the success of auto-enrolment.

(ii) It represents a missed opportunity to build on the success of auto-enrolment.

(iii) It further complicates the pension and saving landscape.

(iv) It undermines the consensus against Pension ISAs.

(v) It targets valuable resources poorly.

Detailed Comments

4. The main problems with the LISA that Prospect has identified are set out in detail below:

- Distraction from auto-enrolment

5. The introduction of auto-enrolment in 2012 has been a success with over 6.7 million workers successfully enrolled by September 2016 [1] and lower opt-out rates and higher employer compliance than initially expected [2] .

6. This success has been built on the back of a broad political consensus and thorough planning ahead of its introduction.

7. As the NAO report on auto-enrolment pointed out, the policy faces greater operational risk as it is rolled out to small employers. The phasing in of increases to minimum contribution levels also presents challenges.

8. A separate NAO report [3] identified "individual interventions ... managed separately without adequate consideration of their impact on the overall objective of increasing retirement incomes" as a potential risk. This warning could hardly fit the circumstances of the introduction of the Lifetime ISA any better. Just as we approach the most challenging phase of the introduction of auto-enrolment, when millions of employees of small and micro businesses are auto-enrolled for the first time, a new savings product is launched in a blaze of publicity. There is a strong argument for delaying the introduction of the LISA until the implementation of auto-enrolment is complete.

9. Building on the success to date of auto-enrolment and dealing with the upcoming challenges that have been identified should be the Government’s main priority. This should include tackling strategies for addressing issues with ineligibility for auto-enrolment [4] and for increasing contributions under auto-enrolment [5] . This is particularly important for workers under 40 because most will be worse off in retirement as a result of the introduction of the new State Pension [6] . Instead the Government is in danger of losing focus on what should be its priority with the introduction of the Lifetime ISA.

- Missed opportunity to build on success of auto-enrolment

10. The LISA is not just a potential distraction from (and even competitor to – see next section) auto-enrolment pension schemes. It also represents a major missed opportunity to increase the attractiveness of auto-enrolment.

11. If Government wants to subsidise younger workers saving towards a deposit on a first home it could just as easily do so through changing the rules relating to the taxation of pension schemes as through introducing the LISA. Such an approach would greatly increase the attractiveness of auto-enrolment pension schemes.

12. Anecdotally, Prospect members who opt out of auto-enrolment pension schemes sometimes report they do so in order to be able to save towards a deposit for a first home. Research shows a majority of young people would be more inclined to save into a pension scheme or would save more if they could use their pension pot to fund a deposit for a first home [7] .

13. In New Zealand the rules of the Kiwisaver allow the withdrawal of savings to purchase a first home [8] . Research from the Pension Policy Institute [9] shows that early access and borrowing against funds for the purpose of home purchases are permitted in other countries. Either of these (or other) approaches in the UK could greatly increase the attractiveness of pension saving and complement the implementation of auto-enrolment. The research shows that opt-out rates for younger workers (already the lowest of any age group) would be even lower if there was a mechanism for accessing funds from their auto-enrolment pension scheme to assist with the purchase of a first home.

14. It is surprising (and disappointing) that the impact assessment for the Bill [10] shows that no alternatives to the LISA were considered. There is a strong argument for delaying the introduction of the LISA to allow consideration of whether allowing access to pension funds for the purpose of purchasing a first home would be a better way of achieving the same aims.

- Complicating the pensions and savings landscape

15. The LISA is not being introduced in isolation. It is being launched in an environment where workers in the target age range can already choose to save in a normal ISA product, a help-to-buy ISA or through an occupational pension scheme (if they are employed). The additional complexity is not helpful, particularly as levels of financial literacy amongst those most in need of support are low.

16. Working out whether a LISA or a pension is more suitable for an individual is not simple. Even ignoring the issue of employer contributions the tax situation depends on the marginal tax rate when saving and in retirement (figure 1 in a useful blog by the Resolution Foundation covers illustrates point in detail [11] ).

17. The presentation of the Government contribution to a LISA as a 25% bonus could easily give many people the impression that it attracts a more favourable tax treatment than pension contributions whereas figure 1 from the blog referred to above shows that is not always the case. There is nothing to stop a future Chancellor varying the level of the bonus paid.

18. For most employees saving for retirement, a pension will be a more appropriate option than a LISA due to the availability of employer contributions. The impact assessment for the Bill assumes that no individuals opt out of workplace pension schemes to save into a LISA. This flies in the face of common sense and available research. Despite the possibility of losing employer contributions, some younger workers will inevitably choose to opt out of a workplace pension scheme in favour of contributing to a LISA. Recent research found that 9% of workers in the target age range may do this [12] . While some will have done this in full knowledge of the overall impact on their finances others will do so in error and will be worse off as a result.

- Undermines the consensus against a Pension ISA approach

19. Shortly before the 2016 Budget, the Treasury made it clear that radical reform of pension tax relief of the type considered in the consultation launched last July [13] was off the table. In particular the proposal for a Pension ISA approach was put on the back burner.

20. This came as a major relief to the wide range of organisations that were opposed to the Pension ISA approach. The PLSA, the ABI, the CBI and the TUC all opposed to the Pension ISA approach. It is tempting to say that when such a wide coalition has come to the same view on an issue like this that it must surely be the correct one. Certainly the previous Pension Minister [14] and her immediate predecessor [15] seem to agree judging by public comments they have made.

21. However the introduction of the LISA presents an opportunity for the Treasury to ignore this consensus and treat the LISA as a soft-launch for this policy with a switch to a full Pension ISA approach for all new savings in the future.

22. Instead of taking a piecemeal approach to policy on saving for retirement (and the taxation of pensions) Parliament should heed the consensus of opinion on Pension ISAs.

- Poor targeting of scarce resources

23. Over the years an effective set of regulations has evolved to protect workers contributing to pension schemes. There is a statutory cap on member charges in the defaults available in defined contribution pension schemes used to comply with auto-enrolment. Schemes used for auto-enrolment purposes must also have a suitable default investment strategy. Trustee bodies and independent governance committees are obliged to assess value of money and act in the interests of members. To the extent that the regulatory regime for LISAs fails to replicate this well-developed regulatory environment there will be additional risk for those saving in such products. This could result in a significant waste of resources that would be better targeted in products designed to optimise long-term returns to members.

24. There will be issues relating to the appropriate investment strategy for funds invested through a LISA. Different investment strategies will be appropriate for different purposes and there is a particular risk that long-term savings will be invested in low-risk, low-return assets resulting in much worse outcomes for members.

25. There is also a question of what products will be available for LISA holders to convert their savings into a reliable income stream throughout their retirement.

26. Finally, LISA products will be availed of by many thousands of people who intend to help their children or grandchildren with a first-time purchase of a home anyway. This could easily amount of a significant subsidy of many thousands of pounds in tens of thousands of home purchases annually. There must be some doubt over whether such sunk costs are appropriate in the current fiscal environment.

October 2016


[1] http://www.thepensionsregulator.gov.uk/docs/automatic-enrolment-declaration-of-compliance-monthly-report.pdf

[2] https://www.nao.org.uk/wp-content/uploads/2015/11/Automatic-enrolment-to-workplace-pensions.pdf

[3] https://www.nao.org.uk/wp-content/uploads/2013/07/10153-001-Government-Interventions-to-support-retirement-incomes-Book-Copy.pdf

[4] http://www.pensionspolicyinstitute.org.uk/briefing-notes/briefing-note-75---who-is-ineligible-for-automatic-enrolment

[5] http://www.pensionspolicyinstitute.org.uk/publications/reports/automatic-enrolment-scenarios-post-2017

[6] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/491845/impact-of-new-state-pension-longer-term-reserach.pdf

[7] http://www.nowpensions.com/wp-content/uploads/2015/03/Pension-freedoms-54-percent-of-generation-Y-want-to-use-pension-pot-to-get-on-property-ladder.pdf

[8] http://www.kiwisaver.govt.nz/new/benefits/home-withdrawl/

[9] http://www.pensionspolicyinstitute.org.uk/briefing-notes/briefing-note-82---lifetime-isas---the-international-evidence

[10] https://www.gov.uk/government/publications/the-savings-government-contributions-bill-impact-assessment

[11] http://www.resolutionfoundation.org/media/blog/own-a-lisa-first-impressions-of-the-lifetime-isa/

[12] http://www.nowpensions.com/press-release/majority-of-lifetime-isa-savers-plan-to-use-money-for-retirement/

[13] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/442159/Strengthening_the_incentive_to_save_consultation__print_.pdf

[14] https://www.moneymarketing.co.uk/ros-altmann-hits-out-at-pensions-as-isas-plans/

[15] http://www.telegraph.co.uk/pensions-retirement/tax-retirement/steve-webb-what-george-osborne-will-do-to-pensions---and-what-he/

 

Prepared 26th October 2016