Blog: Cheque’s in the post

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The problem with pensions policy is perennial – the temptation to push things into the never never.

It’s certainly true of private companies. Look at Trinity Mirror, which last month announced that it had taken the controversial and unusual step of paying its US creditors ahead of its pension scheme debt.

Premier Foods, the owners of such venerable brands as Hovis and Oxo, has also got in on the act by deferring a £94m contribution to its pension scheme until 2014 as part of a refinancing deal.

For many employers, the pensions cheque is always in the post. Refreshing in this context therefore was BT’s decision to stump up £2bn as part of a programme to repay its scheme’s deficit. The government, as the custodian of the national interest should follow BT’s lead. Unfortunately, the fall-out from last month’s Budget shows that ministers are just as prone to short term pressures as their colleagues in the private sector when it comes to pensions.

In the run up to Budget Day, the talk centred on the scrapping of higher rate tax relief for pensions contributions. A debate over pensions tax relief may be a common staple of the pre-Budget period, but this year the tenor of the discussion was more serious.

Treasury chief secretary Danny Alexander set pulses racing when he claimed in an interview that scrapping higher rate relief could generate up to £7bn per annum for the public finances. The pensions industry mounted a very public defence of existing reliefs, which proved successful. Higher rate tax relief emerged unscathed.

However, while the industry can breathe a sigh of relief, the intensity of the speculation about the relief has doubtless damaged long-term efforts to promote retirement saving.

Instead we got the ‘granny tax’ – the one bit of the Budget that didn’t get leaked. The Treasury targeted pensioners’ tax allowances, which ministers aim long-term to bring into line with those of the working age population.

In itself, this change to the tax regime is unlikely to dissuade today’s workers from saving for their retirement. But linked moves to ensure that some employees are not included in the tax system at all look set to have unintended ramifications for the government’s efforts to promote workplace pensions. This is because ministers have made the trigger point for being auto-enrolled the same as the personal taxation allowance.

Judging by the Department of Work and Pensions’ statement; issued just before Pensions Insight went to press, it has no immediate plans to break the link between the two figures.

The worry is that this laudable move to lift the poorest workers out of the tax system will frustrate efforts to recruit the same low paid individuals into workplace schemes. But while this reflects the law of unintended consequences, the government’s announcement on the Royal Mail scheme carries more clearly the whiff of short term thinking.

The government isn’t playing fast and loose with the Royal Mail’s members. They and their representatives in the Communication Workers Union will be happy that their benefits will be guaranteed by the taxpayer. The change gets the government off the hook created by its desire to privatise the loss making utility. No buyer would have wanted to be saddled with the Royal Mail scheme’s liabilities.

The move also gave an immediate £28bn fillip to the government’s deficit reduction plan. However the way that the government’s accounting rules work mean that while the scheme’s assets count on the government’s books, its liabilities do not.

Professor Stephen Booth of City University’s Cass Business School has estimated that the deal will burden the public with £9.5bn worth of additional future liabilities. That’s not a problem for the scheme or its members, but it is for the rest of us, who will be saddled with having to pay the bill long term.

Meanwhile turning a funded scheme into an unfunded one does not quite fit with the government’s wider rhetoric about bringing down the cost of public sector pensions.

It is also timely to remember that when a similar move was being considered by Labour in 2008, the then shadow business secretary Alan Duncan condemned it as storing up trouble for the future. It still is.

It also reinforces the message that pension liabilities are something that can be shoved into some point in the future. Similar short term thinking could be said to characterise the government’s moves to inject pension fund investment into infrastructure, fleshed out in the Budget in the form of a £2bn infrastructure platform.

Leave aside that while some pension funds have signed up to the platform, many are distinctly unwilling to bankroll high risk infrastructure projects. Given that cost of government debt is so low, reflected by chancellor George Osborne’s decision to look into locking in current low borrowing costs by issuing perpetual bonds, there have to be question marks over creating an elaborate and potentially much more costly mechanism to fund infrastructure projects. Anybody remember the private finance initiative?

But then the trouble is that governments, unlike pension funds, don’t have to think about the long term - the next election is generally the limit.