Pensions policies for the general election

The political consensus on pensions policy appears to be breaking down ahead of the forthcoming general election. Here we look at where the three main parties stand and at what may change if there is a government of a different hue.

On this page:
Disappearing pensions consensus?
Means-testing of pensions
Private sector pensions
Taxation of high earners
Conservative Party alternatives
Nest eggs are separate issue
State pension age and tax
Labour Party
Changes to auto-enrolment process
Regulatory balance
Liberal Democrat policy
Our research.

The next UK general election is due to take place on or before Thursday, 3 June 2010. Because local government elections take place on 6 May, it is widely expected that the general election will also be on that date. On the other hand, some commentators believe that it is more likely that the general election will be held earlier so that the Chancellor of the Exchequer, given the provisions already made in his pre-Budget report, can avoid having to deliver a Budget before the dissolution of parliament.

Disappearing pensions consensus?

A general consensus in respect of pensions policy between the main political parties has generally held sway over recent years following the work carried out by the Pensions Commission. In particular, this was clear during the period that the Pensions Act 2008 progressed through its parliamentary stages. That consensus may not hold during the general election campaign.

A taste of this possibly disappearing consensus was evident in the parliamentary exchange reported in the box overleaf. In practice, however, it may be that the consensus on pensions policy established by the Pensions Commission report will re-emerge relatively intact after the election, whether or not there is a change in government, for reasons of pragmatism.

There could be three areas where the consensus breaks down: (a) means-testing, (b) support for the new government pension scheme and hybrid private sector pensions, and (c) tax relief on pension contributions for high earners.

Means-testing of pensions

The attitudes of the parties to having the maximum means-tested state pension credit set at a higher rate than the full basic state pension continues to generate debate. Labour has accepted means-testing as a necessary evil, whereas the Conservatives are more resolutely opposed.

In practice, the reduction to 30 in the number of qualifying years needed to obtain a full basic state pension, the 2008 change to the savings credit threshold and the freezing of the maximum savings credit in real terms from 2015 will ease the situation. Over the longer term, linking the rate of the basic state pension to earnings rather than prices should reduce the disparity. The Conservative, Labour and Liberal Democrat parties have all undertaken to link increases to earnings from 2012, or by the end of the next parliament at the latest.

Private sector pensions

The National Employment Savings Trust (Nest) scheme (formerly known as personal accounts) is due to be phased in from October 2012. This may be an electoral issue, as scepticism about its effectiveness has grown during the delay in its introduction (see extract from debate).

However, it is the decline in defined-benefit (DB) schemes provided by private sector employers, and their survival in the public sector, that dominates the headlines in the pensions press. Given that employers are now paying an average DB contribution of 23.2% of earnings, private sector pension provision will in future increasingly be defined-contribution (DC).

The key political issue is probably the call by the Association of Consulting Actuaries and others for government to deregulate DB provision and allow a more flexible approach to the provision of benefits, in particular by allowing the sharing of risk between employers and members rather than the transfer of all of the risk from the employer (under DB schemes) to the employee (under DC schemes). Such a policy, however, has not found favour with the current Government. If a new government took a different approach to such "middle way" schemes, the question would be how many employers (and finance directors in particular) would be willing to sponsor them rather than DC schemes that pose almost no financial risk at all to the employer.

Taxation of high earners

The Government's decision that, from April 2011, tax relief on pension contributions is to be restricted for those with incomes of £150,000 points to a sharp policy difference between the political parties. As discussed below, however, reversing the policy change may not be an easy option.

Conservative Party alternatives

In a speech to the CBI on 23 June 2009, Teresa May, Shadow Secretary of State for Work and Pensions, said: "A lot of people say to me we should just give up on DB schemes. 'They have had their day, they are finished, let's move on.' Let's be clear. It may be impossible to save DB schemes, but I don't believe we should just give up on the whole concept. My concern is that the alternative - defined-contribution schemes - pass all the risk to the employee." May saw hybrid schemes as offering a means of salvaging some element of DB provision.

May also referred to the reluctance among many to save for a pension. She believes that many individuals on lower incomes feel anxious about putting money away in a pension pot that cannot be touched until they near retirement. She said: "Obviously there are drawbacks to early access, such as individuals drawing down too much and not having enough for their retirement, but this could be dealt with by regulation if the scheme was drawn up wisely."

• ending the obligation to purchase an annuity by age 75; and
• setting up an independent Office for Budget Responsibility to conduct a full review of public sector pensions, and placing a cap on the biggest government pensions, including those for senior civil servants, local council executives and quango managers.

Nest eggs are separate issue

In relation to the current legislative changes, May said: "I believe that personal accounts [now Nest pensions] and auto-enrolment need to be considered separately. They are not co-dependent and we mustn't view one as the only means to the other." She added: "my Party broadly supported them when the Government first set out their proposals. However, we are beginning to have concerns about what personal accounts will deliver." May stated that if the Conservatives win the general election they would hold a review into personal accounts as early as possible.

In a later speech on 13 October 2009, at the Conservative Party conference, May explained that the Party had further concerns about personal accounts especially in relation to the plan that "3% employer contributions will not be reached until 2016, six years after Lord Turner's initial target date for personal accounts to begin." She added: "Far from boosting saving, we could see employers leap at the chance to level down their contributions to 1% for a few years, a considerable reduction on average DC contribution levels. Clearly there needs to be some degree of phasing-in but I do not think anybody expected to see contribution levels of 1% as late as 2015."

State pension age and tax

In relation to state pension age (SPA), May said in her conference speech: "We need to look at bringing forward the rise in the state pension age… We have made it clear that the beginning of the rise to 66 will not take place before 2016 for men and 2020 for women. These are the kind of tough decisions that need to be taken and a Conservative Government will not duck them." The Party's draft manifesto (on the Conservative Party website) confirms this stance and a recent briefing note (PDF format, 94.74K) (external website) from the Pensions Policy Institute examines the proposal.

George Osborne, the shadow chancellor of the exchequer, dealt with the changes to tax relief on pension savings for high earners, and making employer contributions to pensions taxable as income for these employees, in a speech to the 2009 Party conference. He said that the Party "should not accept Labour's new 50% tax rate on the highest earners as a permanent feature of the tax system". However, he went on: "But we could not even think of abolishing the 50p rate on the rich while at the same time I am asking many of our public sector workers to accept a pay freeze to protect their jobs. I think we can all agree that would be grossly unfair."

Labour Party

As the Party which has been in government since 1997, Labour records the following changes that it has made:

• 900,000 pensioners have been lifted out of poverty since 1997;
• spending on pensioners has been increased by around £13 billion in real terms by comparison with the previous administration;
• introduction of the winter fuel allowance and free off-peak bus travel for over-60s and free TV licences for over-75s;
• carers of elderly or disabled people have been given the right to request flexible working;
• legislation to tackle unfair age discrimination in the workplace has been brought in; and
• average pensioner incomes from the state are up by 25%, more than the rise in earnings over the past decade.

It also draws attention to recent developments providing help for pensioners that includes: providing the maximum basic state pension to those reaching state pension age from April 2010, provided they have 30 qualifying years; cutting VAT in 2009, which was worth £275 off the average household bill; an extra £60 bonus for pensioners on top of a rise in the state pension; increasing the state pension credit to a minimum of £130 a week; a winter fuel payment of £400 for households with an over-80 member and of £250 to the over-60s; trebling the value of cold-weather payments this year and increasing funding for the warm-front programme to insulate pensioners' homes; and helping savers by increasing the threshold of individual savings accounts to more than £10,000. It also points to the decision to increase, in future, the basic state pension in line with earnings.

Changes to auto-enrolment process

On 9 December 2009, the Chancellor of the Exchequer, Alistair Darling, announced changes to the workplace reforms in his pre-Budget report. An adjustment will be introduced to allow new companies setting up during the implementation period more breathing space to establish themselves before they are required to auto-enrol their workers; and to look to extend this extra support to small and micro-businesses, "without unduly compromising the overall delivery of the reform package". In addition, support will be provided to ensure that all workers have time to get used to saving for a pension at the lowest phase level of contributions.

This measure means, in turn, that an employee could be auto-enrolled into a workplace pension slightly later in 2016.

Regulatory balance

It seems that, if re-elected, the Labour Government would maintain its balance between regulation and deregulation.

In May, the Parliamentary Under Secretary of State, Lord McKenzie of Luton, addressed the Financial Times Buyout and De-risking Summit. He said: "The existing regulatory regime for occupational pension schemes is designed to help employers provide pensions for employees on the understanding that the employer will stand behind the pensions risk. It is built on the assumption that the employer will provide ongoing support. Part of its focus therefore might be said [to be] to de-risk matters for scheme members. At the same time as ensuring that members' benefits are protected, the Government's intention is to allow markets to thrive by ensuring regulation is transparent, proportionate and appropriately targeted."

He stressed that the Government's priority "as ever, remains maintaining the vital balance between easing regulatory burdens on industry whilst maintaining adequate protection for members' benefits".

Liberal Democrat policy

The Liberal Democrats endorse the overall consensus on pensions arising from the Pensions Commission and, like the Conservative and Labour parties, state that they would re-link increases in the state pension to increases in average earnings, but they go further by stating they would implement this change immediately. This, however, would be "just a stepping stone" before they introduced a universal state pension based on residency in this country, the "citizen's pension", that would be set above the poverty line, so all pensioners could have a decent standard of living.

In addition, the Liberal Democrats state that they would:

• scrap arbitrary retirement ages and would create a flexible decade of retirement, giving older people the opportunity to remain in the workplace for longer, retrain and continue to contribute to the country's economy;
• support older people in employment by strengthening and enforcing age-discrimination legislation; and
• promote new learning opportunities for older people by offering student loans to those over age 55 and enforcing age-discrimination legislation in training, so that resources are not focused exclusively on younger people.

Our research

This feature is based primarily on recent speeches made by senior politicians in the Conservative, Liberal Democrat and Labour Parties.