30 September 2015
Pensions Consultation 2015
Pensions and Savings Team
HM Treasury
1 Horse Guards Road
London SW1A 2HQ
Submitted via email to: [email protected]
RE: Strengthening the incentive to save: a consultation on pension tax relief
Dear Sirs,
BlackRock, Inc. (BlackRock)1 is pleased to have the opportunity to respond the consultation on
pension tax relief issued by HM Treasury.
As a fiduciary for our clients, BlackRock supports a regulatory regime that increases
transparency, protects investors, and facilitates responsible growth of capital markets while
preserving consumer choice and assessing benefits versus implementation costs.
We welcome the opportunity to address the issues raised by this consultation, and will continue
to contribute to the thinking of HM Treasury on any specific issues raised in our response.
Executive summary
In the context of dramatic increases in longevity, it is key that individuals in the UK save more,
and start earlier, if they are to achieve appropriate levels of retirement income. Simplification of
the pensions tax regime will not of itself address the current savings gap, though transparency
and consistency in the application of the tax regime could engender increased confidence in
saving for retirement. Individuals need greater confidence in the regulatory and tax framework
for saving over the long term. This requires increased transparency at many levels:
•
Transparency and certainty over the long term policy framework for retirement savings.
This is a prerequisite for individuals making investment decisions for their retirement
needs many decades in the future.
•
Individuals will also benefit from clarity as to what they need to save to achieve a given
level of income. This needs underpinning by comprehensive advice and guidance from
product providers and advisers to empower individual participation.
•
Transparency as to the taxation and key features - such as the value for money - of welldesigned products, such as workplace pension plans, should continue to be a key focus.
We have carefully considered HM Treasury’s key principles for reform against what we see as
the drivers for successful reform. To achieve the Government’s overriding objective of increasing
the savings rate, we recommend a focus on five key objectives:
1. Simple, transparent and fair tax treatment for pensions that provides a strong
incentive for individuals to save
2. Increase saving through compulsory participation
1
BlackRock is one of the world’s leading asset management firms. We manage assets on behalf of
institutional and individual clients worldwide, across equity, fixed income, liquidity, real estate, alternatives,
and multi-asset strategies. Our client base includes pension plans, endowments, foundations, charities,
official institutions, insurers and other financial institutions, as well as individuals around the world.
1
3. Ensure the long-term stability of the system
4. Maintain employer support for pensions
5. Promote a longer-term investment culture
We recommend achieving these objectives by implementing the following:
1. Simple, transparent and fair tax treatment for pensions that provides a strong
incentive for individuals to save
We recommend:
•
Maintaining the current ‘exempt, exempt, taxed’ (EET) basis for pensions. In any move
to a ‘taxed, exempt, exempt’ (TEE) basis there are fundamental issues around whether
future governments would commit to maintaining the tax exempt basis. There is also a
high probability of confusion, operational cost and market fragmentation from running
legacy pension pots on an EET basis in parallel with future pensions on a TEE basis.
•
Maintaining the pensions lock regardless of tax treatment.
•
Moving to a flat rate of tax relief to deliver more progressivity, rebranding tax relief as a
government matching contribution. We also recommend considering ways of simplifying
the payroll challenges for employers of this move.
•
Removing the lifetime allowance, creating more certainty for younger savers and those
who might otherwise refrain from saving into a pension due to concerns around
exceeding limits on the value of their savings.
•
Simplifying the annual allowance by putting in place a sustainable annual allowance of
what individuals can contribute (i.e., remove the recently announced ratchet of the annual
allowance from £40k down to £10k. We believe the goal of a more progressive
application of tax relief would be achieved via a flat rate of tax relief rebranded as a
matched government contribution).
2. Increase saving through compulsory participation
The single most effective action to deliver long-term pension sustainability is a strict requirement
for all individuals to save a specified percentage of their earnings. We therefore recommend:
•
Introducing compulsory pension savings at an increased contribution rate, under the
existing auto-enrolment framework. At the current trajectory, auto-enrolment is set to
raise minimum Defined Contribution (DC) contributions to 8% of qualifying earnings by
September 2018, but for most individuals this is unlikely to be sufficient. We recommend
a minimum contribution rate of 15% of salary but encourage individuals to save at least
20% - this would be on a level with contributions made to private sector Defined Benefit
(DB) schemes2.
•
Continuing to use the architecture of auto-enrolment to ensure that individuals saving in
pension plans do not simply put their holdings in cash, thus protecting them against the
risk of not saving enough, and protecting the real value of their savings from the effects
of inflation.
•
Phasing in higher contribution rates using auto-escalation techniques such as “Save
More Tomorrow”.
2
ONS Occupational Schemes Survey 2014 showing that average total contribution rate was 20.9% of
pensionable earnings – 5.2% for members and 15.8 for employers.
2
3. Ensure the long-term stability of the system
Government needs to convince individual savers that there is a stable pensions system. We
recommend:
•
Permitting fewer changes, to allow for clear and consistent long-term messaging, by
setting up a clear framework to distinguish between major policy changes that require
cross-party support and full public consultation, and ongoing second tier adjustments.
•
Ensuring mid-term and long-term budget compatibility to underpin consistent policy.
•
Gaining cross-party support, removing the habit of successive governments to alter the
rules according to short-term priorities.
•
Creating an independent, institutional framework (e.g. Office of Pension Responsibility)
as a way of depoliticising the formation and maintenance of savings policy-making, and
ensuring continuity. This would complement industry calls for a Savings Minister to
coordinate long-term savings policy3. This level of long-term institutional transparency
would in turn help incentivise individuals to take a longer-term view of their savings.
•
Providing a framework for individuals to access a coherent and holistic view of their
retirement savings including pensions, ISAs and other potential sources of income.
4. Maintain employer support for pensions
We recommend:
•
Ensuring that employers (both the corporate entity and senior managers) remain
incentivised, so that the workplace remains at the heart of pensions savings.
•
Continuing to incentivise employers, in particular through National Insurance
Contribution (NIC) relief, to contribute to workplace pensions, such as by matching
contributions under the existing auto-enrolment framework, and to maintain an easy to
use administrative framework for employees.
•
Ensuring higher and additional rate taxpayers retain a stake in the pensions system. The
relative size of their contributions is key to sustainability of DC schemes for the wider
population.
5. Promote a longer-term investment culture
We should not underestimate the cultural change required for individuals to take responsibility
for their own retirement:
3
•
The long-term savings and pension regime should reward those who lock away money
for future retirement needs. Any reform of tax incentives should strengthen, not weaken,
the link between pensions and long term investment.
•
As part of our call for an Office of Pensions Responsibility and a Savings Minister, we
also call for further reflection on the design of the pensions schemes of the future, to
encourage investment in longer term asset - such as infrastructure – that are key to the
sustainable growth of the economy.
TSIP, Saving our Financial Future, 2014
3
•
In particular we recommend focussing on mechanisms to encourage master trusts to
invest in long-term assets that offer the potential to match the long term liabilities of the
trust. As part of this assessment we would welcome renewed focus on collective DC
schemes.
We set out more detail on these key actions before answering the specific questions in the
consultation.
1.
Simple, transparent and fair tax treatment for pensions that provides a strong
incentive for individuals to save
We recognise the need for budget sustainability. There is, however, also a need for reliable public
information as to the cost of maintaining the state pension under the triple lock and tax reliefs
into private pensions, over both the short and medium term. The short-term cost to the budget
also need to be weighed against long-term benefits of budget sustainability in the UK (See Point
2 below).
Reform, don’t abolish, existing system of tax reliefs
We support reform of the current system of EET tax relief, rather than the more extreme proposal
of moving to a TEE regime. We would however welcome changes to a number of key measures
in the current system framework of tax relief, to make it more transparent:
•
Maintain the current ‘exempt, exempt, taxed’ (EET) basis. The benefit to savers of EET
is that more is invested for longer, allowing compounding of return on capital plus the
value of tax relief. This should generate larger pension pots, increasing the likelihood of
individuals being able to achieve their retirement savings goals.
•
In any move to a ‘taxed, exempt, exempt’ (TEE) basis there are fundamental issues
around whether future governments would commit to maintaining the tax exempt basis.
There is also a high probability of confusion, operational cost and market fragmentation
from running legacy pension pots on an EET basis in parallel with future pensions on a
TEE basis.
•
We support a more streamlined use of tax reliefs under the current system, targeting
lower and middle income earners who need the most support by moving to a flat rate of
tax relief to deliver more progressivity.
•
We recommend rebranding tax relief as a government matching contribution.
Terminology is important. The way reliefs work and the grossing up of percentages are
not well understood. Branding any relief as a matching contribution from the government
would meant that individuals can immediately grasp that for every £100 they contribute,
the government has contributed an additional £x, and their employer £y. This could for
example be shown as a single national rate of government pension matching contribution
for DC schemes, with the state providing £1 for every £2 from the employee/individual
(‘Buy 2 get 1 free’).We support the outcomes of research commissioned by TISA from
the Pensions Policy Institute on the benefits of a government matched contribution to
pensions.4
There are also likely to be presentational issues for HMT in the level of match that is
equivalent to a marginal rate of relief. As the Investment Association has noted, a front
end rate of relief of 30%/£1 plus a tax free lump sum of 25% of the final fund sounds a
lot more persuasive than a government match of 10%/£1 in a TEE model. In a TEE
model, a higher match rate would be needed to make the incentive more attractive to the
individual, and this in turn would make the TEE system more expensive than EET. This
highlights the importance of behavioural economics and the framing of tax incentives
when designing an incentive structure.
4
E.g. TSIP, Saving our Financial Future, 2014
4
•
Take employer payroll concerns into account when planning a move to a single rate of
tax relief. A number of operational considerations have been highlighted by
commentators and these will need to be worked through with proper consultation with
industry participants to minimise the costs of implementation.
•
Remove the lifetime allowance, creating more certainty for those who might otherwise
refrain from saving into a pension due to concerns around exceeding limits on the value
of their savings. As it stands, the lifetime allowance undermines the very personal
responsibility that the Government is keen to promote.
•
Simplify the annual allowance by putting in place a sustainable annual allowance of what
individuals can contribute (i.e., remove the recently announced ratchet of the annual
allowance from £40k down to £10k).
The consultation is premised on the assumption that the Government is paying significantly more
in tax relief than it is gathering in tax from pension/annuity income. Even before the April 2015
legislation changes, this premise has to be understood in the context of how reliefs are allocated.
We note recent studies that indicate that a significant proportion of tax reliefs are allocated to
funding deficits in DB schemes rather than to DC schemes which appear to be the focus of the
much of the consultation.5
Indeed, after the introduction of pension freedom, income tax raised on the lump sum payments
allowed under the new regulations will be greater than the income raised on average
pension/annuity incomes, after taking into account personal allowances, e.g. if someone takes
an annual annuity of £1,000 they are unlikely to pay much tax each year, whereas a person
receiving a small pot lump sum or an uncrystallised pension fund of, say, £9,000 or £19,000 will
pay a one off tax charge if the draw down is in excess of their tax free lump sum. Given the
number of drawdowns that have been taking place, this should represent a significant change to
budget projections6. The Government will see a significant rise in tax income in this and
subsequent tax years as many of the new lump sums paid will generate tax income where many
of the smaller annuities would not have done. The impact of these changes need to be factored
in to any discussion of the continued sustainability of pension tax relief.
2.
Increase saving through compulsory participation
We welcome steps taken in recent years to ensure that UK citizens can meet the challenge of
increasing longevity with confidence. In particular, raising the retirement age, introducing autoenrolment and the establishment of NEST have all contributed to improving the UK pension
system sustainability in the long term. In particular, we welcome the effect that auto-enrolment
has had on reducing the decline in pensions savings.
The need for compulsory savings
Significant as they are, these steps are not enough. Last year individuals in Britain put less than
a tenth of their wages into savings7 - less than their counterparts in nearly every other country in
Europe. The wider European average is closer to 15%. This means there is still too great a risk
that individuals are not saving sufficiently if they remain enrolled at the default contribution rate,
or indeed that they will opt out of savings entirely. As the BlackRock Investor Pulse survey
revealed, only two in five (43%) Britons know how much they should be saving for retirement,
and 44% are not saving anything at all. Recent statistics from the Office for National Statistics
(ONS) show that while total membership of private sector DC schemes has increased as a result
of auto-enrolment, average contribution rates for private sector DC schemes have dropped to
4.7%. While this drop may be indicative of new members being enrolled at lower rates than
5
Towers Watson Perspectives: Ending higher rate tax relief on pension – not as obvious as it seems,
May 2015
6
Royal London, Research shows that pension freedoms customers are potentially losing out, 20 August
2015
7 The Telegraph, 31 October 2014
5
existing members, it is nevertheless a powerful indicator of the scale of the challenge faced in
raising average contribution rates for all.i8
To achieve an individual’s long-term goals of retirement income, we need people to save more,
and save earlier. We therefore recommend making an appropriate level of retirement saving
compulsory, without the opportunity to opt out, at a rate that will provide a sustainable retirement
income. As a point of reference, the Department of Work and Pensions’ (DWP) own calculations
suggest a minimum level of 15% is required to meet replacement income levels9. We suggest
this should be a minimum rate but that where possible individuals should be encouraged to reach
to match the typical contributions currently made to a typical private sector Defined Benefit (DB)
scheme where contributions are currently in excess of 20% of an individual’s salary. 10
Financial education plays an important role and is certainly improving, but at the moment it is
poorly co-ordinated and sends out mixed messages. People are still inclined to borrow rather
than save when making major purchases, and those who do save are prone to holding
inappropriate levels of cash to meet their long-term income needs. It is also far too complicated
and difficult to invest as a consequence. Many simply do not feel sufficiently confident to invest
in stock or bond markets and as a result have far too high a dependence on cash. Our most
recent Investor Pulse survey found that non-advised investors have a staggering 74% allocated
to cash11.
Saving benefits everyone. It ensures growth, stability and prosperity for the future of the UK and
its people. It provides businesses with capital to grow, while ensuring that poverty in old age
becomes a thing of the past and that people avoid the financial desperation brought by excessive
debt. A failure to narrow the savings gap could adversely affect the UK’s GDP, so it is of critical
economic as well as social importance.
We acknowledge that a move to significantly higher contributions is not a move that can happen
overnight. We believe there is much opportunity for using auto-escalation techniques, and save
more tomorrow schemes.
How can save more tomorrow schemes provide the answer?
The US has provided some innovation solutions to circumventing the problem of savings inertia
- with ‘Save More Tomorrow’ schemes. These schemes aim to ensure that people never have to
cut their spending in order to save more, and have seen savings rates at some participating
companies quadruple12.
These simple schemes allow individuals to pre-elect a percentage of any future pay increases
for investment into their pension pot. This means that as salaries increase, savings are increased
automatically and savers don’t have to take the difficult decision of where and how to cut their
spending.
This could easily be replicated in the UK under the auto-enrolment scheme by starting at the
minimum auto-enrolment rate with individuals gradually saving more each time they receive a
pay rise. This will also help to address the issue of affordability of pensions to new entrants to
the market place - many of whom are likely to be saving for a first home and/or paying off student
loans. By the time employees reached 30 or over, they would be at significantly higher
contribution rates, but it would have been considerably less painful on the way.
This would also address the problem of the auto-enrolment ‘cliff’ between September 2017 and
October 2018. At this point, individual auto-enrolment contributions are due to rise five-fold from
0.8% to 4%. This is a substantial increase, and one that new entrants to the workforce will need
to save from day one. Replacing this ‘cliff’ with an auto-escalation / save more tomorrow scheme
8
ONS Survey as above.
TISA response to HMT Strengthening the Incentive to Save consultation
10 ONS Occupational Schemes Survey 2014 shows that the average total contribution rate was 20.9% of
pensionable earnings – 5.2% for members and 15.8 for employers.
11
BlackRock Investor Pulse Survey UK, 2014
12 FT, Save more tomorrow gives pensions a boost, 8th January 2012
9
6
would enable contributions to increase gradually, and help avoid this shock for both current and
new savers alike.
We recommend aligning this change of approach with the pension simplifications proposed. This
relatively simple change in the way that corporates approach their schemes could facilitate a seachange in the pension outcomes for millions.
Of course, the approach is not limited to corporate schemes, but would also be relatively easy to
facilitate with personal pension portfolios. We urge the Government, companies and all advisers
constructing personal or corporate pensions to embed these automatic rises into their schemes.
3.
Ensure the long-term stability of the system
There has been much commentary on the relative attractiveness of ISAs over pensions as a
savings vehicle. This has much to do with the relative simplicity and attractiveness of the ISA and
a long-term commitment by successive governments to maintain the simplicity and transparency
of the ISA as a savings product.
The frequent changes to the UK pensions regime, whether in terms of annual allowance, tax
relief, changes to drawdown, however necessary or well-intentioned, have not been
accompanied by clear long-term messaging. The rate and speed of change causes uncertainty.
The rules are still convoluted - each change brings an additional layer of complexity to negotiate
that may continue to deter potential investors. As people take more individual responsibility for
their retirement, it is vital the system is simple and transparent. More than half of Britons13, said
they would be encouraged to save more if the Government provided a stable pensions system,
and circa one in five (19%) supported the introduction of a Savings Minister tasked with protecting
the interests of savers.
Our recommendation for an Office of Pensions Responsibility, supporting industry calls for a
Savings Minister, provides an ideal opportunity to develop short, medium and long-term
projections to underpin consistent government policy
Office of Pensions Responsibility
The combination of frequent change and complex rules complicates decision-making process
and disincentivises individuals from saving for retirement through pensions. Retirement savings
reform is too important to be looked at on a piecemeal basis. It is critical that the whole body of
pension reform to date is underpinned by a clear long-term strategy that can last through
successive governments. A 29 year old today expecting to retire in 40 years’ time at 69 can
expect to live through eight different governments. To encourage people to save sufficiently early
into their pensions there is a pressing need for an institutional framework that provides pensions
certainty, and ensures that short-term budgetary or political constraints do not erode the longterm sustainability and adequacy of pensions as a vehicle for saving for retirement.
The recent appointment of a new minister for pensions shows a welcome commitment on the
part of policymakers to the issue of long-term saving. We believe the Government might now go
one step further, with the appointment of a Savings Minister, or, better still, the creation of an
independent, apolitical post – the Office of Pensions Responsibility. This role would be designed
specifically (i) to champion and promote a savings culture across the UK and (ii) to provide
independent data and projections on what proposed tax or regulatory changes would mean for
the sustainability of the pensions system in the short, medium and long term.
We believe it would not increase bureaucracy, but would act as a way of streamlining the current
system and depoliticising it, removing the habit of successive governments to tinker with the rules
according to their short-term priorities. The Office of Pensions Responsibility could review the
whole system, and also look at the unintended consequences for savers of introducing new
legislation across government departments (e.g. Treasury, Cabinet Office, Department of Work
13
BlackRock Investor Pulse Survey UK, 2014
7
and Pensions, Department of Communities and Local Government, Department of Business
Innovation and Skills).
Encourage a holistic view of retirement savings through effective education and guidance
Individuals saving for retirement are likely to have more than one type of retirement pot (as well
as other sources of income, such as home equity and state pension entitlement under the triple
lock). They think of their ‘nest egg’ as a whole, and focus less on the individual pot. While
pensions are less well understood than ISAs, we believe the way forward is not to convert existing
pensions into ISAs - especially after the immense effort of education that has taken place on
auto-enrolment. There will be a greater impact if individuals are able to access holistic financial
advice across all their assets when planning for retirement so they have a full view of their
financial assets.
In this respect we welcome HM Treasury’s and the FCA’s joint initiative to launch the Financial
Advice Market Review, and hope that the outcome of the review will be to facilitate the provision
of advice on retirement savings across all sources of potential income and recommend focussing
on whether there should be a middle way for more limited advice. We believe such an option
could assist savers in making core decisions about their retirement, especially if designed around
recent technological developments. We suggest that effective delivery requires clear and
engaging digital communications, supporting interpersonal services (predominantly telephonebased support with some online direct communication).
Effective support and guidance is the lynchpin of new pensions’ freedoms. Impartial guidance
standards that fully integrate the principles of treating customers fairly, ‘kitemarked’ by an
independent body, could provide a valuable adjunct to the third party support provided by
Pensions Wise. Impartial standards would have the important benefit of providing consistent
levels of guidance to savers. It could also form the basis of offering providers safe harbours by
limiting potential liability for those who meet these impartial guidance standards.
4.
Maintain employer support for pensions
Maintain incentives for employers to contribute to workplace pensions
Employers are responsible for much of the administrative burden of pension provision for the
Government, such as by collecting contributions and making additional contributions. This
engagement is significant in terms of the long-term sustainability and integrity of the pensions
system.
In addition, the financial incentives for employers to contribute should be retained, as matching
employer contributions funded through NIC reliefs are a valuable benefit for individuals, and will
provide material support for individuals to reach an adequate savings rate. We also believe that
employer national insurance relief should continue to apply to employer pension contributions,
and that employee tax relief on employer pension contributions should remain as it is now.
While reforming higher rate tax reliefs, ensure senior staff retain a stake in the pensions system
Recent budget announcements restricting the lifetime allowance and annual contributions that
attract tax relief from higher rate earners run the risk of disengagement from the pensions system
by higher rate earners. Many DC pension schemes rely on the significant level of contributions
from higher and additional rate earners to develop scale. It would be counterproductive to the
overall running of the scheme if these earners are disincentivised from making contributions to
their schemes. As mentioned above we recommend moving to a single sustainable annual
allowance, allowing the removal of the annual lifetime allowance.
Higher rate tax earners are typically higher rate earners for only a relatively small proportion of
their total working life, and it would run counter to the aim of a consistent long-term pensions’
policy to take them out of the pensions system for part of their life. The opportunity to make
increased pension contributions later in life can help to balance lower rates of savings earlier in
life. Higher rate earners are also more likely to be involved in decision-taking over a firm’s pension
8
policy and retirement benefits. If key individuals themselves have no stake in their firm’s pension
policy, then the risk of badly designed workplace pension provision increases.
5. Promote a longer-term investment culture
The design of automatic enrolment incentivises individuals saving in pension funds not to put
their holdings in cash. This helps to protect them against the risk of under-saving, and inflation
reducing the real value of their savings. The reliance on default investment strategies is crucial
in mitigating individual’s inherent investment risk-aversion. From an investment perspective it is
essential that individuals have access to a wide range of appropriate asset classes in which to
invest their savings and build an income in retirement.
Long-term investment is the way to generate long-term consistent growth for the economy, and
pension fund investment forms the bedrock of this wider long-term funding for the economy. By
definition pension liabilities are long-term and individuals should therefore be incentivised to take
a long-term investment view. The pensions regime should be designed to provide savers with a
form of illiquidity premium, to reward those who lock away money for future retirement needs.
Any reform to tax incentives should strengthen, not weaken, the link between pensions and longterm investment. Any change that makes short-term investment or cash holdings more attractive
would be to the detriment of both individuals and the long-term health of the economy.
There is a real and pressing need for investment in long-term assets such as infrastructure, and
we note increasing calls for public sector DB schemes to combine assets to invest in this area.
However, within private sector DC pensions the very construct required to facilitate individual
investment decision making forces investment to be channelled towards investments in more
liquid instruments traded on public markets. As part of our call for an Office of Pensions
Responsibility and Savings Minister, we call for further work on how a wider section of the
population could be incentivised to invest more in longer-term assets.
This requires innovative thinking. We make some initial suggestions and would be delighted to
contribute further to Government thinking in this area:
•
It would be beneficial to review the investment rules to encourage investment in longer-term
assets. The liability matching benefits of longer-term assets, such as investment as
infrastructure, come with a number of associated structural issues. These are largely ‘buy
and hold assets’ and schemes would need to maintain a limit on the total percentage of
illiquid assets they hold, say around 20%. Schemes will also need a detailed liquidity
management policy, such as that required under the Alternative Investment Funds
Management Directive (AIFMD), to cover the effect of transfers out of the scheme, which
might generate greater concentration in illiquid assets. This could be effectively mitigated by
the use of mechanisms such as side pockets to facilitate secondary market transfers of the
underlying assets. This would need to be accompanied by clear messaging to members that
transfers during the accumulation period could be phased. Further work on the liability of
trustees and IGCs would also be needed, to provide them with appropriate safe harbours if
they put in place longer-term investment strategies of this nature as well as further guidance
on the inclusion of longer-term assets in the assessment of value for money they are required
to make.
•
Further work on designing collective DC schemes could be beneficial such as the work
conducted by NEST earlier this year (the idea of individual ownership engendered by DC is
very much welcome, however we also need to bridge the long-term challenge and pooling
assets could be a very efficient way of achieving this).
•
We also recommend a new way of incentivising long-term saving for future generations, by
harnessing the power of the “eighth wonder of the world” - compound interest over an
individual’s full life time, so that by the time adults start to enter the workplace they have
already built up a pot which sets them well on the road for financial independence in later life.
There are a number of ways this could be achieved, e.g. by government contributions to the
Junior ISA with an element of lock-up so that government contributions made early in life
9
which when compounded over 60-70 years could help to reduce reliance on the State later
in life.
We would welcome any further discussion on any of the points that we have raised.
Yours faithfully,
Paul Bucksey
BlackRock
Head of Defined Contribution, UK
[email protected]
Martin Parkes
BlackRock
Public Policy, EMEA
[email protected]
Tony Stenning
BlackRock
Head of Retail, UK
[email protected]
10
Responses to individual questions
1) To what extent does the complexity of the current system undermine the incentive for
individuals to save into a pension?
Individuals saving for retirement have a number of fragmented sources of capital and income.
These include the state pension, and in the private sector also Defined Benefit (DB) pensions,
Defined Contribution (DC) pensions, ISAs and property. Understanding how to combine all these
sources of income is complex and challenging for individuals. For many years primary
responsibility for planning for retirement lay between the state and employers. The state pension
and employer run schemes still remain a considerable source of retirement income. The system
is being rebalanced towards a greater take-up of DC pensions, which requires greater
responsibility from the employee. For decades, many individuals have been sheltered from
financial complexity by their employers and it will take many years to build up the level of financial
education and engagement where individuals are empowered to take full responsibility for their
own financial planning.
While simplifying the tax treatment of DC pensions could provide some benefits, it does not
address the more challenging issue that unless individuals have access to sophisticated financial
advice and planning they are ill equipped to have an understanding of their total personal assets.
Inertia, and the complexity of the current savings framework, are also powerful barriers to
effective individual engagement.
Recent changes such as pensions freedoms are encouraging greater engagement by individuals
with their retirement savings, but we believe the three areas that will have most impact are:
•
Development of tools by both government and industry about income expectations both
from government and industry on how much income the state pension is expected to
provide and what income various sizes of pension pot are expected to deliver. The
general public would benefit greatly from generic guidance that includes how much
saving for a typical goal might be appropriate. It is essential to deliver online tools
covering topics such as longevity, living costs and investment in this process.
•
The ability to access holistic financial advice which allows individuals to combine all their
various sources of potential income, not only at retirement but well in advance and take
informed decisions. Financial advisers can better serve their clients’ needs if they can
provide advice with respect to all of their clients’ assets, without the avoidable burden of
complex, conflicting or overlapping regulatory requirements. We strongly support the
aims of the Financial Advice Market Review as a key plank in providing individuals from
the tool kit they need to make effective decisions.14
•
The ability to pool information about different accounts in a single place, through the
introduction of a digital passport.15
We believe that DC solutions are a key component in delivering a sustainable income in
retirement. Providing a more simplified tax treatment is only one part of ensuring that DC
pensions are designed to:
• Meet a wider range of consumer needs, such as providing a predictable level of
retirement income with various draw down options
• Keep generating returns as savings deplete over time
• Be easily understood and transparent
• Be cost efficient
• Provide online guidance throughout retirement
We also underline the continued importance of offering default solutions designed to meet the
needs of the majority of savers in both the accumulation and decumulation phases. As much as
we support the need for tools to assist individuals in planning for retirement, a significant
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15
Financial Advice Market Review August 2015
TSIP, Saving our Financial Future, 2014
11
proportion of the population will only have limited engagement. Where savers do not make, or
delay making, decisions regarding their savings on retirement the default solution will have to
operate in the decumulation phase – in effect this would be the new default retirement option
unless a saver makes an active decision to tailor their retirement income.
2) Do respondents believe that a simpler system is likely to result in greater engagement
with pension saving? If so, how could the system be simplified to strengthen the
incentive for individuals to save into a pension?
While we believe that a simpler tax could assist in making it easier to engage with individuals,
there are two key issues which should be explored – framing an individual’s retirement needs,
and compulsory saving for retirement.
Framing an individual’s retirement needs
In our view it is essential to frame an individual’s retirement needs. The shift from DB to DC has
placed the three dimensions of retirement investing firmly on the shoulders of participants: saving,
asset allocation16, and the transition into retirement spending.
Today, most individuals equate saving for retirement with accumulating a pot of money for
retirement, and using this either as a cash lump sum or purchasing an annuity. The transition of
accumulated savings instead into an efficient income stream needs to be addressed. This is
particularly important as the mechanics of this transition and the benefits of potential solutions
are poorly understood by most participants (and indeed are not catered for in traditional product
designs). Yet research we have conducted in the US has shown that members with pension
schemes that define the income benefit, or who have a high degree of certainty about their
accumulated savings’ ability to generate income, believe they are more prepared for retirement.17
What most individuals need is a reliable form of income to fund retirement spending, specifically,
to cover expenses such as housing, food, heating and leisure costs, etc. Annuitisation provided
certainty in this regard, but with little or no flexibility of income over time.
Wealth accumulation is largely a function of savings rate and market returns. Retirement
spending, or rather the obligations that require spending, generally has no relationship to market
returns – it is difficult to decrease spending in years when markets are falling because there is
an effective spending floor, unless specific advice is taken on reducing expenses in adverse
market conditions. In the retirement savings construct, individuals seek to fund a set of spending
obligations that in most cases have no analogy in the investor’s asset portfolio.
The key, therefore, is for product providers to combine product design with features to help
members understand the connection between their current retirement savings and their future
spending power, to help them protect their future income potential, and help manage the impact
of market volatility on their portfolio’s ability to provide such income. This should ultimately benefit
participants in that they can achieve more clarity about their ability to meet their spending
obligations in retirement.
Compulsory savings
We welcome steps taken in recent years to ensure that UK citizens can meet the challenge of
increasing longevity with confidence. In particular raising the retirement age, introducing autoenrolment and the establishment of NEST have all contributed to improving the UK pensions’
system sustainability in the long term. In particular we welcome the effect that auto-enrolment
has had on reducing the decline in pensions savings.
Significant as they are, these steps are not enough. There is still too much risk that individuals
are not saving sufficiently if they remain enrolled at the default contribution rates or indeed that
16
Dalbar Quantitative Analysis of Investor Behaviour, 2008
According to the BlackRock 2012 Annual Retirement Survey, participants with a DB plan are more likely
to report that they are prepared for (66%) and will have enough money to (62%) retire.
17
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they will opt out of savings entirely. To achieve an individual’s long-term goals of retirement
income we need people to save more and save earlier. We therefore recommend making an
appropriate level of retirement savings compulsory, without the opportunity to opt out, at a rate
that will provide a sustainable retirement income.
We acknowledge that this is not a move that can happen overnight. We believe there is much
opportunity for using auto-escalation techniques such as the ‘Save More Tomorrow’. We
recommend building on the insights from the behavioural finance experts in this areas such as
those from The Behavioural Insights Team.18
As with auto-enrolment, we would encourage the Government to find a politically neutral option
acceptable to all parties, in order to be consistent over the long term, rather than changing with
each change of government. Workers coming into the workforce in their ‘20s may find it
challenging to meet a very high contribution rate initially, due to challenges such as housing costs
and repayment of student loans. Auto-escalation techniques could be used to ensure that the
amount and contribution and rate of increase could be aligned to a number of factors such as
age, time to retirement and affordability so that they could gradually reach the right level of
savings. By way of benchmarking an appropriate savings rate, to generate an income
replacement rate equivalent to that under direct benefit schemes, an individual would need to
contribute sums in excess of least 20% of their salary.
3) Would an alternative system allow individuals to take greater personal responsibility
for saving an adequate amount for retirement, particularly in the context of the shift to
defined contribution pensions?
As mentioned in our response to the previous questions we believe that the primary objective of
an alternative system should be to require compulsory savings building on auto-enrolment to
require individuals to save to a sufficient level so that they can enjoy a dignified retirement with
an adequate amount of retirement income. This should be supplemented by continued focus on
default savings options, more effective use of tax reliefs and an ongoing focus on education.
There should also be a wider debate on the interaction between housing policy and retirement
savings.
Designing default savings options
As well driving greater personal responsibility we should not underestimate the challenge and
time it will take for individuals to start engaging more closely with retirement planning. Building in
a default savings mechanisms is a necessary complement to compulsory savings. The role
played by default funds such as those provided by NEST and other providers is key, especially
for the average investor with little knowledge of finance and investments.
When comparing initiatives taken in other jurisdiction faced with similar challenges to encourage
greater engagement with pensions savings, we note some useful experience in the US. The US
Pension Protection Act of 2006 (PPA)19 is a good example of a fundamental change that achieved
these objectives. Through the PPA, Congress and the Department of Labor (DoL) enacted
legislation and implemented regulations designed to make it simple to increase savings and
improve investment of those savings.20 The PPA provided for automatic enrolment, automatic
escalation and “qualified default investment alternatives” (QDIA), which were intended to
collectively improve retirement outcomes. In particular, by adopting asset allocation products as
QDIAs, the PPA addressed the problem that the average investor, with little knowledge of finance
and investments, had overwhelming allocations to company stock and conservative fixed income
investments and did not change allocations over time.21 The DoL recognized that participants
18
19
20
21
The Behavioural Insights Team, EAST: Four simple ways to apply behavioural insights, 2014
Pension Protection Act, Pub. L. No. 109-280, 120 Stat. 780 (2006).
Notice of Proposed Rulemaking - Default Investment Alternatives under Participant Directed
Individual Account Plans, 71 Fed. Reg. 56806, 56807 (Sept. 27, 2006).
71 Fed. Reg. at 56806-07; See also William J. Wiatrowski, “401(k) Plans Move Away from Employer
Stock as Investment Vehicle,” Bureau of Labor Statistics, Monthly Labor Review (November 2008),
available at http://www.bls.gov/opub/mlr/2008/11/art1full.pdf.
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need help in allocating their savings across asset classes to achieve a better outcome and, by
establishing asset allocation products as a safe harbour, it provided that help.
Simplifying tax reliefs
Secondly, we support considering a more streamlined use of tax reliefs under the current system,
targeting tax reliefs at lower and middle income earners who need the most support Payroll
implications of such a change would also need to be taken into account. The result should be a
cleaner way of limiting the amount of tax relief paid to higher rate earners, without disincentivising
them from investing in pensions.
We would also recommend rebranding tax reliefs, as this is a concept that is not well understood.
Instead, we suggest referring to this as a government matching contribution into an individual’s
pension. Expressing the matching as a simple ratio or message such as – for every £100 pounds
an individual contributes, the government puts in an additional £x. We have referenced a number
of studies in our introductory section 1 which set out how this could work in more detail.
We also support an annual cap on the amount of savings that can be saved into DC schemes,
and abolishing the lifetime allowance. This would create more certainty for those who might
otherwise refrain from saving into a pension due to concerns around exceeding limits on the
value of their savings. Similar to ISAs, this would be provided on a ‘use it or lose it’ basis. The
amount of the annual contribution provides the Treasury with a mechanism to encourage or
limit savings.
Consider the implications of housing
Psychologically many individuals put securing a place on the housing ladder well before savings
for a pension. This has the effect of delaying the time when an individual starts saving for
retirement and/or encourages the view that ‘my house is my pension’. To counter this, we would
welcome investigation of the benefits of allowing an early draw down from an individual’s pension
pot to fund the first time purchase of a property. There are similar precedents in other pension
regulation in the world such as those in Singapore and the US. If permitted, we would recommend
limiting access rights to a one-off partial draw down.
Continued focus on education
These measures will need to be accompanied by a significant focus on education. Compulsion
simplifies the first key step individuals have to take. It will then need to be accompanied by key
messages around respective contributions from individual, employer and government to
emphasise the value of matched contributions. This would build on the presentations used in
auto-enrolment showing how matching contributions work. We would minimise references to the
use of percentages, as these are often not as well understood as monetary figures.
4) Would an alternative system allow individuals to plan better for how they use their
savings in retirement?
One of the key challenges individuals currently face is a lack of understanding of how much
income their retirement income will be worth. We suggest that simple metrics could be useful,
such as how much income a pot of £100,000, £250,00, £500,000 would buy you now, and in say
10 years’ time. Given the benefits of compounding over time, we strongly recommend using
messages that show the likely income from a pound saved when an individual is in their ‘20s,
their ‘30s and ‘40s.22
The scale of changes proposed in the 2014 Budget calls for a fundamental rethink in the way that
savers are supported, so they can make informed decisions. In our view, the logical and most
suitable bedrock of this approach would be the provision of free and comprehensive guidance
programmes, where the dominant features would be clear and engaging digital communications
(online and mobile based technologies – tools, simple modelers, informative content and the
22
Scottish Widows press comment, 7 September 2015, www.scottishwidows.co.uk
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provision of a retirement ‘dashboard’ enabling members to track their investment, income and
glide path needs) with supporting interpersonal services (predominantly telephone-based support
with some online direct communication).
The core principles of guidance by pension providers should involve:
(1) Suitability for the majority of individual savers
(2) Cost effectiveness
(3) Transparency of the guidance outcome (in particular the default option)
On the first two points, we believe it is important to strike a balance between addressing the
needs of the widest possible audience and doing so without increasing the cost of service
provision which ultimately reduces investor returns. This requires considering the relative
importance of DC savings by different cohorts of investors within the population.
The lowest earners, for whom current State Pension benefits alone are likely to lead to a high
replacement income, will likely continue to favour taking their DC savings as a lump sum – the
’default’ decumulation into cash is therefore likely to remain appropriate. At the other extreme,
there is likely to be a proportion of the highest earners who will have other sources of income and
are unlikely to rely solely on replacement incomes from DC pensions. The core target audience
is therefore a wide range of earners between these extremes, for whom DC pensions are likely
to be their largest savings assets and for whom simply annuitising would result in significantly
lower replacement incomes upon retirement than they would expect. Conversely, if they draw
down capital on retirement they would be exposed significantly to the longevity risk of outliving
their savings. Technology and scale will be central to providing tools to address the needs of this
audience.
On the third point, it is important for providers to be transparent on how money will be invested
in the absence of instruction from the investor (i.e. default options). This is particularly important,
as scalable guidance cannot cover every possible circumstance but will seek to be appropriate
for most instances such as the default options. Individuals can then take the decision as to
whether it is worthwhile to pay for further advice from an independent financial adviser or other
qualified professional.
We agree that face-to-face financial advice (as opposed to mere guidance) will have a place in
those situations where personal financial affairs and taxation implications are more complex, and
for those that specifically wish to access and pay for such support. In the savings accumulation
phase we see a place for workplace access to other forms of support (‘face to faces’), e.g. onsite
presentations to larger groups of employees, webinars via employer portals etc. as part of an
overall provider to employer support programmes. However, employer engagement with postretirees will not be a feature in most cases and hence achieving direct engagement between
provider and individual will be key to providing guidance during the post-retirement phase.
We also note the need to ensure that financial planning for retirement takes into account all
potential sources of income. The schematic below shows the four key sources of income.
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DB/DC
/personal
pensions
State pension
Indivdual
retirement
income
ISAs, stocks,
shares,
deposits
Other souces
such as
lifetime
mortgages
Currently these various sources of income are generally treated differently in terms of advice.
Moving to a fully investor-centred advice model would allow individuals to access a holistic view
of their asset and potential income. We recognise that some of these areas call for very specialist
advice and are designed to have very specific consumer protections in mind, such as the regime
for lifetime mortgages which has proved to be robust. There does however need to be a way of
combining all this information in a way which allows an individual to ask key questions such as,
‘How much money can I expect to live on in retirement?’ and ‘What do I need to do to save more
in retirement?’.
5) Should the government consider differential treatment for defined benefit and defined
contribution pensions? If so, how should each be treated?
No. In our view this will generate significant operational complexity. It will be counterproductive
to change the tax treatment for existing schemes. If such a change were applied, it would
inevitably lead to a segregation of pre and post implementation pension pots, or a requirements
to close old pots and reopen them under a new name. Individuals would then have to understand
the impact of two different tax treatments on their income expectations which would be even more
confusing than under the current system. Administrators would also have to run dual systems (i)
for contributions made under the existing system until the time of change over and (ii) in respect
of new contributions after the change of tax treatment. This would be costly, and discriminate
against existing participants in the market who would be obliged to maintain legacy systems
without the benefits of economies of scale. Taken together, this runs counter to the aim of
reducing fragmentation and encouraging simplification of pensions.
6) What administrative barriers exist to reforming the system of pensions tax,
particularly in the context of automatic enrolment? How could these best be overcome?
There are significant educational and operational challenges in moving from an EET basis to a
TEE basis of taxation.
There are significant downsides in a wholescale change to a TEE system. Regardless of what
future changes are made existing schemes will have to continue to operate on an EET basis.
This means operating two systems concurrently. The operational complexity and confusion to
savers and providers of running two systems in parallel would be significant. In particular there
would be a significant increase in the expense of educating customers about what they can and
can’t do
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While a TEE system may be perceived as simpler in practice, the fact is that the vast majority of
DB and DC pots would be legacy business, and have to be administered on an EET basis for
decades to come. We have contributed to the work of the NAPF to identify the cost implications
this would entail, and refer to response to this consultation.
In addition, these changes would create a large pool of closed legacy providers who would not
be able to benefit from the economies of scale from new and increased contributions without the
incentives to innovate and reduce administration costs to members. It is likely that employers
would also suffer unnecessary additional cost in supporting multiple systems and in explaining
the effect of different entitlements to their employees.
Without a strong commitment over many years from successive governments to maintain a TEE
basis for new contributions, many savers will have concerns that larger pots built up in the future
will be subject to tax on drawdown at some future date. This would provide the type of disincentive
to savings that Government is keen to avoid.
7) How should employer pension contributions be treated under any reform of pensions
tax relief?
We believe it is essential to continue to incentivise employers to make basic provision for all staff.
Employer contributions represent a significant incentive to savers, and cut the cost to the
Treasury.
Employers are responsible for much of the administrative burden of pension provision for the
Government such as by collecting contributions and making additional contributions. This
engagement is significant in terms of the long-term sustainability and integrity of the pensions
system.
In addition, the financial incentives for employers to contribute should be retained as matching
employer contributions are a valuable benefit for individuals and will provide material support for
individuals to reach an adequate savings rate. We also believe that employer national insurance
relief should continue to apply to employer pension contributions and employee tax relief on
employer pension contributions should remain as it is now.
8) How can the government make sure that any reform of pensions tax relief is
sustainable for the future?
We welcome the focus that the Government has brought to ensuring that the UK’s retirement
system meets the needs of future generations without imposing undue burdens on the budget.
Unlike the ISA regime where the central framework has remained stable with various welcome
additions such as passing on ISA on inheritance, there is a perception that the pension system
is unstable which brings a consequential lack of trust.
While some significant changes need to be brought in, this must be done in a way that provides
certainty and consistency. We refer to our recommendations for an Office of Pensions
Responsibility in Point 3 of our general recommendations.
There also needs to be a clear cost benefit analysis of the operational complexity and expense
of proposed changes to ensure that operational inefficiency doesn’t outweigh the benefit of any
incentives offered.
We appreciate the opportunity to address and comment on the issues raised by the consultation
and we will continue to work with HM Treasury on any specific issues raised in our response.
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