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Home > Blogs > Pensionomics > Osborne's Budget: what does it mean for pension reform?

Osborne's Budget: what does it mean for pension reform?

Pension reform | Osborne's Budget: what does it mean for pension reform? Pensionomics

24 hours on, it’s time to take stock of the Budget.

  • Simplifying benefits and taking more pensioners out of the tax net is good. The decisions to introduce a flat state pension and rise in the personal allowance are encouraging, and should go a long way towards providing a more efficient and equitable pension system. Sustainability, however, continues to be a question.
  • The idea of indexing the state pension to longevity and the notion of an independent committee are excellent steps forward – longevity is as important as interest rates to the future of the economy. The devil, however, will be in the detail.
  • The extra money to tackle youth unemployment is welcome, but it is important that we don’t forget those at the other end of the generational scale.
  • The decision to accept the Hutton report recommendations is a good first step but the chosen discount rate will likely continue to obscure the problem.
  • The British obsession with property continues to puzzle and the decision to provide additional token relief there is misplaced. Why perpetuate a popular delusion that diverts valuable savings away from people's pension pots?
  • Overall, a start towards reforming the system, though the journey will be much longer than just this parliament.

Yesterday, we shared our thoughts on what we hoped for from the Chancellor’s Budget. Now 24 hours later, it is time to take stock.

Much of the major pensions-related reforms within this Budget was trailed early, notably the introduction of a flat state pension and the recommendations made by the Hutton report. Still, it is a significant budget in terms of its ramifications for pensions in the UK and there was one notable detail, namely the aim to index the state pension to longevity going forward in some way.

First, simplifying benefits and taking more pensioners out of the tax net is good. The decisions to introduce a flat state pension and rise in the personal allowance are encouraging, and should go a long way towards providing a more efficient and equitable pension system by simplifying the system and providing significant cost savings. Sustainability, however, continues to be a question that will need to be addressed given the enormous demographic pressures on the UK economy as discussed previously.

The idea of indexing the state pension to longevity is an excellent step forward and long overdue. Ultimately, any solution to the pensions crisis involves recognising the role of increasing longevity and realising that we are a long way from when Bismarck first introduced the state pension and set the retirement age at 70 years. The notion of an independent committee is also excellent - longevity is as important as interest rates to the future of the economy and deserves its own version of the 'MPC', insulated from political pressures. The devil, however, will be in the detail of the mechanism.

The extra money for apprenticeships and vocational skills programmes is welcome as it is vital to preventing another pensions crisis in the future, but it is important that the money goes towards both the young and the old. In the aftermath of the recent crisis, 18-24 year olds have been disproportionately affected as new jobs prove to be a luxury. Many have broken employment records and will begin saving later (and likely less) for their retirement. Therefore, more needs to be done to tackle youth unemployment.

However, we shouldn’t forget those at the other end of the generational scale. Older workers near retirement were also disproportionately affected and increasing numbers of pensioners are working past their retirement date already – over 12% compared to just 8% a decade ago, and at least in part due to an inadequate retirement pot. Coupled with the planned rises in the retirement age, there is a need to focus policy on retraining and investing in human capital to give older people an adequate choice of alternative careers, particularly in professions that require manual expertise such as construction, where age will be an insurmountable barrier. Age discrimination will also be an area that needs significant policy attention for the same reasons.

The decision to accept the Hutton report recommendations is a good first step but the chosen discount rate will likely continue to obscure the problem. There are many who have not liked Hutton's policy recommendations, but if an increase in employee contribution rates can help to salvage public sector DB occupational pensions from being scrapped, then surely this ought to be a price worth paying. The discount rate of inflation + GDP, however, is not ideal and should serve as a stop-gap till some better measure. Discount rates are important only in so far as they are used to determine contributions and ultimately the sustainability of the pension system. But GDP projections have notoriously wide error margins and can often be revised in hindsight. It could turn out to be the right discount rate or it could turn out to be painfully wrong. Having said that, I hope the government will publish these numbers regularly going forward. Transparency is what is required to resolve the problem.

And last, there was property. The British obsession with property continues to puzzle and the decision to provide additional token relief there is misplaced. Millions of people have under-saved for the long-term in the mistaken belief that their property is their pension. The money announced does not really move the needle on mortgage lending but still risks perpetuating a popular delusion that diverts valuable savings away from people's pension pots.

Overall, it’s a start towards reforming the system, though the journey will be much longer than just this parliament.

This guest blog was first published on Pensionomics.com

Tags: budget , George Osborne , pension , pension system , reform , UK
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