Which hard choices?
In 2014, Steve Webb, the then Pensions Minister, made some widely reported remarks about the prospect of people using their pensions to buy a Lamborghini. He was discussing recently announced changes now known as ‘Pension Freedoms.’ These were a radical shift in how people plan and save for retirement.
There has been wide reporting in advance of the budget in November that Torsten Bell, the current pension minister, is taking a leading role in pulling it together. At the recent Labour conference, his pronouncements on anything remotely related to tax policies were written up feverishly by news outlets. So having looked at the problem last month, this month we will look at the man who has the job of coming up with the solution.
Mr Bell is the Labour MP for Swansea West as well as being a government minister. Unoriginally, he did PPE at Oxford and then worked as a special adviser under Alistair Darling. Like Steve Webb, he comes to his role with a long-term interest in the interaction of tax policy and social outcomes. His most significant public role was as chief executive of the Resolution Foundation, which he ran for a decade before stepping down in 2024 to become an MP.
What is he going to suggest Rachel Reeves do in her budget? Well, helpfully, he’s written a book with quite a lot of detail in it. He thinks income is taxed too much and wealth too little. As a result, he suggests that Dividend and Capital Gains Tax should rise to the level of Income Tax over time, although he points out that gains should only be taxable if they increase over the rate of inflation. He also suggests that gains from company shares should be taxed at a lower rate to account for corporation tax already having been paid.
He dislikes Stamp Duty as something that distorts housing and reduces flexibility in the labour market; he would replace the revenue by taking the politically difficult decision to reclassify Council Tax bands, thereby increasing our other main property tax.
Higher earners can find some succour in Mr Bell’s suggestion to remove the perverse incentives for those on incomes of between £60,000 and £125,000. Because people lose child benefit, other child-related benefits and then the Personal Allowance for Income Tax as their earnings increase, they experience very high marginal rates of tax. He would aspire to make Child Benefit and the Personal Allowance universal.
National Insurance is a source of Mr Bell’s ire because it is incurred only on earnings; the typically wealthier landlord or business owner will often not pay them (and thus pay a lower rate of tax than tenants or employees). He does not seem to believe in incentivising entrepreneurship through lower taxation. Nor is he a fan of maintaining the triple lock on the State Pension and would rather see this invested in increased benefits for those in work.
Beyond specific items of tax policy, one of the primary concerns in the book, Great Britain? : How We Get Our Future Back, is the low level of investment in the United Kingdom. We have, so the argument goes, been sweating our impressive national stock of assets (think Victorian railways, roads and sewers) without putting aside enough to maintain, update and expand them. This is a contributor to the UK’s low productivity and wages when compared to similar economies. For Torsten Bell, a big part of the solution is the pension system.
Bell commented recently that: “one of the biggest mistakes of the last 25 years has been to stop thinking about your pension schemes as plumbing for your capitalism.” What does this mean? He is keen to see the Pension Protection Fund’s (PPF) role expanded and for consolidation amongst the large pools of assets within the UK defined benefit pension system. The idea is to create organisations that will fuel economic growth by undertaking infrastructure investment in the country. Clearly, the intention is to partly direct this capital, which is notionally invested to provide for current and future pensioners, towards investments which are seen to be in the long-term interests of the whole nation.
I have two concerns with this idea. One is that the rules which are designed to direct flows of pension capital to UK investments will in fact lead to the assets being captured by clever, nimble and global private equity firms. These firms are doing a very effective job selling their wares to large pension funds already; I am sceptical about the benefits of this.
The other problem I can foresee is that, whether premeditated or not, this might be a first step in solving the government’s debt problem. If the government were to expand the PPF and direct it to make loans to specific infrastructure projects, it has a potentially captive source of funding. My antennae twitched when I read an interview last week from Michelle Osterman, the new head of the PPF. Amongst other things, she argued explicitly in favour of giving an expanded PPF the ability to issue its own debt.
If, over the long term, private sector capital is directed to places where it is paid a rate of interest below the prevailing rate of inflation (which seems to be heading up again!) the result is a solution to the government’s debt burden. This could be done by making these super funds invest in national projects; it could also be done by requiring other private capital to buy their debt instruments (to lend to them). But there is a cost. In this case the returns the fund or their bonds achieve may be well below what could have been achieved elsewhere and will, by definition, not keep pace with inflation. Considering the whole point of investing for your retirement is to avoid the ravages of inflation in achieving a long-term goal, this is a bad outcome for the individual pension holder.
Torsten Bell strikes me as a likeable and thoughtful character. I admire the fact that he has volunteered for front-line politics. He is directly confronting many of the policy problems he has previously commented on from the sidelines. There are no easy choices; we have formed an unhelpful habit of disparaging those who step up to make those choices regardless. When Steve Webb introduced Pensions Freedoms more than 10 years ago it was under a liberal mantra of individual responsibility. A decade later, a successor seems set to announce a set of policies designed to do the opposite: to divert pension capital to places deemed helpful in addressing the problems of the nation. Historically, this has usually ended poorly for those whose wealth is diverted. Whether it provides alms to the ailing UK fiscal position and contributes to a hoped-for national renewal, only time will tell.
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