by Sandra Wolf and Cintia Cheong

The government will accelerate changes to the 0.75% default charge cap in defined contribution schemes, chancellor Kwasi Kwarteng said in his plan for growth speech on Friday. He is dismantling the Office of Tax Simplification, saying he wants simpler tax to be embedded across the government, raising questions about the future of pension taxation and ominously announced reforms to financial regulation to be revealed in autumn. 

 

The government said it will “help unlock billions of pounds of investment into scaling up the UK’s science and technology firms” by accelerating draft regulations to reform the pensions regulatory charge cap, “giving defined contribution pension schemes the clarity and flexibility to invest in the UK’s most innovative businesses and productive assets creating opportunities to deliver higher returns for savers”. Kwarteng said the measure “will benefit savers and increase growth". 

 

 

Last year, the Department for Work and Pensions consulted on excluding performance fees from the charge cap. The Treasury has shown a keen interest in getting private capital from pension funds flowing towards UK ventures since the 2001 Myners report and through the 2017 patient capital review. 

 

As well as accelerating this change to the charge cap, Kwarteng’s plan includes introducing a Long-Term Investment for Technology & Science competition, to provide up to £500m “to support new funds designed to catalyse investment from pensions schemes and other investors into the UK’s pioneering science and technology businesses”.   

 

While financing investment, the government claims that savers will “benefit from higher potential returns”. 

 

The Pensions Management Institute has given the measure “a cautious welcome”. Tim Middleton, director of policy and external affairs, said the charge cap change was a pragmatic step which will make investment in illiquid assets a more attractive option for DC schemes.  

 

“However, we should not lose sight of trustees’ responsibilities to members: their priority is to identify appropriate investment opportunities for members rather than to support specific sectors of the economy. Ultimately, if this innovation is to succeed it will be because science and technology would represent an appropriate investment and a legitimate alternative to existing assets,” he stressed. 

The Pensions and Lifetime Savings Association said it is supportive of finding ways for schemes to choose to invest in infrastructure and other less liquid assets, including through the productive finance working group.

However, the PLSA is not convinced that the charge cap change alone will increase pension fund investment in illiquids. Deputy director of policy Joe Dabrowski said: "While this change will remove one barrier, on its own, it is not likely to lead to a very large degree of additional investment. Other measures will also be needed, and we continue to work on these issues with government. The overriding duty of any pension scheme trustees’ is foremost to invest in the interests of its members.”

 

Steven Cameron, pensions director at provider Aegon, said illiquid investments can deliver higher returns but can also have higher charges, some of them subject to performance fees which cannot be known in advance, which presents a big barrier to pension funds. 

 

“Faced with unpredictable performance fees, schemes have feared such investments could lead to charges breaching the 0.75% cap for automatic enrolment workplace pension default funds,” said Cameron. 

  

“A small increase in charges in return for a bigger increase in investment returns is of course a good thing and could boost members’ pension pots. However, fears of breaching the charge cap is not the only barrier discouraging pension schemes from investing in illiquids, and many already have charges well below the 0.75% cap. One key point for those who do use the new relaxations is to make sure members understand the longer term potential investment benefits rather than simply being concerned over potentially higher charges,” he added. 

 

 

While pensions taxation was not addressed by the chancellor in his speech, this could change in future, as he is keen on simplifying the tax system.  

 

“For the tax system to favour growth, it needs to be much simpler,” said Kwarteng, announcing that he is winding down the Office of Tax Simplification, introduced in 2010. “Instead of a single arms-length body which is separate from the Treasury and HMRC, we need to embed tax simplification into the heart of government,” he said. 

 

Pensions tax is notoriously complex due to multiple thresholds and reliefs. Tax relief has long been a source of disagreement in the industry, with some arguing in favour of a flat rate system instead of one that works with people’s marginal tax rate. 

 

A widely trailed tax measure was confirmed by the chancellor in his speech: the health and social care levy of 1.25% brought in by the previous government – initially in the form of higher national insurance contributions – is being reversed. The higher threshold for NICs introduced in July remains, while the cut in the basic tax rate to 19% is brought in a year early, in April 2023. 

 

This is a “slight ‘sting in the tail’ regarding tax relief on pension contributions”, according to Cameron, although pension schemes which collect pension tax relief through ‘relief at source’ are given an extra year to collect at the 20% rate. 

 

However, a freeze in the income tax threshold until 2026 introduced by former chancellor Rishi Sunak was not mentioned in the speech and is remaining in place, pushing an estimated 1.6m people into the higher rate tax bracket by 2026 and raising about £30bn.   

 

Pensions allowances are also unchanged – for now. While the Chancellor has been quick to reverse many of his predecessor’s policies, one change where there has been no movement is in relation to the pensions lifetime allowance, which is currently frozen until 2026, noted Jenny Holt, managing director for customer savings and investments at Standard Life. 

 

“If current rates of inflation continue, the current freeze is likely to come under more pressure,” she predicted. The allowance has been blamed by doctors for creating pressure on the NHS as high earning clinicians leave to avoid a pensions tax penalty. 

 

Other major announcements in the speech include scrapping the 45% tax rate, bankers’ bonus cap and VAT for tourists, and lifting stamp duty thresholds. Low-tax ‘investment zones’ and ditching the previous government’s plans to increase corporation tax to 25% are also among the tax-cutting measures the government believes will incentivise investment and lead to more growth. 

 

With the same intention of encouraging growth, Kwarteng hinted at future reforms around City regulations. “To reaffirm the UK’s status as the world’s financial services centre, I will set out an ambitious package of regulatory reforms later in the autumn,” he said. Prime minister Liz Truss has reportedly floated the idea of merging the Financial Conduct Authority, Prudential Regulation Authority and the Payment Systems Regulator. 

 

 

In addition, the government aims to bring in ‘minimum service’ requirements to limit unions’ right to call for strikes, just as the pensions row about the TfL Pension Fund is about to escalate further and pay disputes in the rail industry and public sector could lead to another winter of discontent. 

 

“Other European countries have Minimum Service Levels to stop militant trade unions closing down transport networks during strikes. So we will do the same. And we will go further,” said Kwarteng. The government will legislate to require unions to put pay offers to a member vote, “to ensure strikes can only be called once negotiations have genuinely broken down”, he added. 

 

The new government’s plan faced criticism not just from opposition parties but even within the Conservative party. John Glen, former economic secretary to the Treasury and City minister, questioned whether it was a good idea to engage in fiscal loosening during a time of monetary tightening, which makes servicing debt more expensive. The Bank of England raised interest rates to 2.25% on Thursday, up from 1.75%, and is actively starting to sell its enormous pile of gilts amassed since the financial crisis, planning to reduce it by £80bn over the next 12 months. 

 

Labour’s shadow chancellor Rachel Reeves likened Truss and Kwarteng to two gamblers in a casino “chasing a losing run”, accusing the government of hiding the cost of its measures and making workers pick up the bill for tax cuts. “It is not that the Conservative party is not working for ordinary families, it’s actively working against them,” she said. 

 

The Association of British Insurers has voiced its support for the chancellor’s focus on growth and making the UK economy one of the most competitive in the world.  

Hannah Gurga, ABI director general, said: “As the chancellor recognised, more can be done to unlock investment and the insurance and long-term savings industry has a vital role to play as institutional investors.  

“We have long called for regulatory change to enable our sector to invest more in infrastructure that supports growth and the transition to Net Zero, and we look forward to hearing from the government on Solvency II reform later in the autumn. We will continue to work with HM government, regulators and our members to ensure this final plan meets everyone’s objectives.” 

Life insurance consolidator Phoenix Group welcomed the government’s plans to enable more insurers’ capital into the real economy.

Andy Briggs, group chief executive of Phoenix, said: “With the right reforms, Phoenix is fully committed to investing significantly in illiquid assets and sustainable investments throughout the UK. We look forward to working closely with all stakeholders to ensure the proposed regulatory framework is in place as soon as is practicable, which would provide increased investment flexibility while not compromising our priority of policyholder protection in any way.”

On the government’s £500m commitment to support science and technology firms, Briggs supports the idea, saying it will enable long-term investors such as pension savers to benefit from the potential of these asset classes. 

He said: “Companies in these sectors are often high growth and many will be vital to delivering the innovative solutions needed to help tackle climate change and respond to the challenges and opportunities of living longer lives in the UK.”

How will the magic money tree be funded?

Craig Inches, head of rates and cash at Royal London Asset Management, queried how the “magic money tree” will be funded as the package will lead to further borrowing. 

He warned the government’s plans will likely see the debt to GDP ratio “skyrocket above 100% in the coming years”. 

Trevor Greetham, head of multi-asset at RLAM, branded the scale of tax cuts and spending increases as “breath-taking”, adding: “Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary global financial crisis, when borrowing costs were low and private sector balance sheets were deleveraging. 

“Now with spare capacity non-existent, inflation at a 40-year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride.”

What do you think about the government’s announcements today?