Drop planned pension tax relief reform, say UK employers

Almost 80% of respondents to a major survey, conducted by the Confederation of British Industry (CBI) and Mercer (44-page /1.8MB PDF), said that recent pension reforms including automatic enrolment and changes to the state pension needed time to bed down before the government considered further changes. Respondents also flagged defined benefit (DB) scheme funding costs, auto-enrolment administrative burdens and the potential for further change from Europe as areas of particular concern.

"Recent regulatory changes, coupled with auto-enrolment and state pension reform, mean UK business leaders now crave stability," said Neil Carberry, the CBI's director of employment and skills.

"Businesses want to focus on ensuring employees are making the most of what's on offer, but there is clear concern about regulatory changes eroding incentives to save, which must be avoided at all costs … Businesses are clear that the current framework of pensions tax relief at the point of saving - while complex - is the best for encouraging pension saving," he said.

"With constantly moving compliance goalposts, there is a significant risk that businesses will unintentionally score an own goal resulting in litigation which will further increase the cost of pensions to businesses," said pensions litigation expert Isabel Nurse-Marsh of Pinsent Masons, the law firm behind Out-Law.com. "If the government doesn't listen to businesses and stop tinkering, the final score will be 1 for politics and 0 for savers and businesses."

The CBI/Mercer survey found that the government's "constant tinkering" with the tax relief framework for pensions in recent years, including cuts to the annual and lifetime allowances, had "damaged business and saver confidence" and was already beginning to impact on the retirement income of mid-level earners, such as teachers and managers. Respondents warned that shifting to an ISA-style system of taxing pension savings would introduce further confusion, while reducing the incentives for employees to save.

Reporting on the results of the survey, the CBI and Mercer said that the current system of tax relief up-front on pension contributions made it attractive for employees to save into a pension compared to other types of saving, while also making it affordable for low- and middle-income earners to contribute. Just under half of respondents said that moving to an ISA-inspired system of contributing to pensions from taxed income would discourage some employees from saving into pensions altogether, while 43% of respondents said that they were already looking at other methods of incentivising employees that were already at risk of exceeding the lower lifetime allowance limit.

Commenting on the government's recent consultation on pensions tax relief, the report's authors said that neither option proposed in the paper would "strengthen the incentive to save" for retirement.

"A flat rate of tax would mean middle-income earners like nurses – not just higher income earners – will be taxed twice on the amount they save," they said in their report. "In an ISA-based scenario, if pension savings are taxed like other income it could incentivise individuals to save into an easy-access ISA, for example, rather than a long-term savings vehicle like pensions. This would be particularly the case for lower earners."

"Overall, such a change would make it much more challenging to get people to save for retirement and is likely to spell the end of pensions as we know them," the report's authors said.

The CBI and Mercer surveyed both business leaders and pensions experts across a wide range of companies, with combined headcounts of around 500,000 UK employees, as part of their research. They found that the cost of DB scheme funding was the biggest issue among boardroom level respondents, with 65% of responses indicating that funding costs had negatively impacted on business investment. This rose to over 80% of responses from directors at mid-sized firms. Firm pension experts also highlighted the potential for future EU regulations to increase compliance costs.

"Solvency-inspired funding disproportionately impacts on a select number of countries, including the UK," said Mercer's global head of DB risk, Frank Oldham. "A blanket approach to pension regulation will further undermine enthusiasm for top class pension provision in this country. The EU should be doing all it can to encourage companies to strengthen pension provision and to improve employee savings habits."

The percentage of survey respondents with concerns about the administrative burden of complying with automatic enrolment increased to nearly 70% this year, up from 41% during the last survey in 2013, according to the report. The biggest challenge in this area, flagged by 73% of respondents, was ongoing compliance with the auto-enrolment rules. More than 80% of respondents said that increasing take-up among employees rather than increasing statutory minimum contribution levels should be the government's priority, rising to almost 90% of respondents from SMEs, according to the report.