It’s no surprise the Emergency Budget included such a strong focus on the issue of pension reform, especially in light of John Hutton’s appointment earlier this week to lead the review into public sector pensions.

Three key developments were announced – accelerating the rise in state pension age to 66, calculating rises in public sector pensions using CPI, and restoring the earnings link on state pensions. Whilst the latter fulfils an election promise, the other changes are harsh but understandable first steps towards the government objective of reducing pensions’ expenditure.  However, several questions will now need answering on each of these if we are to achieve genuine, impactful reform for the long term:   

•  On the rise in state retirement age: We simply have to take into account the fact people are living longer.  The move to accelerate the state retirement age to 66 is long overdue and will help control the balance between those paying for pensions and those drawing them. Despite the former Government’s plan for a rise of only three years by 2048, we estimate that life expectancy will increase by eight years in that span. Given this, arguably more still needs to be done on this front.
  
• On calculating rises in public sector pensions based on CPI: The bottom line is that this is a move designed to save the Exchequer a significant amount of money. The Government has a target of 2.0% for CPI and historically RPI has exceeded this by just over 0.8% per annum so this move could save 10% or more of public sector pension liabilities. However, it may be seen as something of a blunt instrument and its’ effects may be felt more intensely by those on lower pensions.
  
•  On the restoration of the earnings link: It is pleasing to see the Coalition Government follow through on this manifesto commitment. We believe this measure could help a move away from the complex system of means-testing pension benefits in the long term and ensure dignity for retirees in old age.

High earners

The decision to re-examine the issue of higher rate pensions tax relief is one that in principle we welcome. The previous Government’s plans were set to severely impact the ability of some people to save for retirement and would also have discouraged senior managers from investing in savings provision for lower paid employees.

However, the Chancellor needs to act quickly to consult the industry on alternative approaches to ensure employers have the necessary clarity they need to prepare and provide suitable benefit schemes for their workforce ahead of April 2011.

Employers should still explore alternative savings vehicles for those employees on either a higher basic wage or wishing to make more substantial contributions. The Government also needs to provide more clarity on anti-avoidance legislation and the exact nature of what vehicles are included in this.

Read our 60 Second News Summary.

Read our inFORM emergency budget special

Read our press release.

HM Treasury