18 May 2010 - Post by:Stephen Beattie
So, for better or for worse the Tories and Lib Dems have jumped into bed together. It’s a marriage of convenience, borne out of necessity and thrust into uncertain times. Undoubtedly, there are going to be choppy waters ahead. One test will certainly be pensions – and there are already some signs of what to expect.
The first pensions offspring from the marriage is actually a re-birth – welcome back Iain Duncan Smith. Previously much maligned (the first modern political leader to be deposed after a no confidence motion from his own party), he’s re-built his career and is now back in the game as Secretary of State for Work and Pensions. As the ninth holder of this position in as many years, it may be that the role is something of a poisoned chalice, but here’s hoping he will rise to the pensions challenge. At 56, at least he’s got more of a vested interest in pensions than most of the fresh-faced new leaders of the country.
What will be on IDS’s agenda? The Tory and Lib Dem manifestos showed a good deal of common ground on private sector pensions. The coalition agreement has also yielded early consensus on:
- phasing out the default retirement age (in both the Conservative and Liberal Democrat manifestos);
- reviewing when the State pension age starts to rise to 66 (not sooner than 2016 for men and 2020 for women, in accordance with the Conservative manifesto);
- increasing the basic State pension annually by whichever is the higher of earnings, prices or 2.5 per cent: a triple guarantee which is not to be sniffed at (in accordance with the Liberal Democrat manifesto); and
- removing the requirement for compulsory annuitisation at 75 (in both the Conservative and Liberal Democrat manifestos). One survey showed this week that people who retired and bought annuities in the week of uncertainty after the election could be £800 a year worse off than people annuitising the week before or after, so picking your own annuitisation date would indeed be welcome.
Also, the Conservatives have accepted Liberal Democrat proposals to increase personal tax allowances to £10,000, starting with a substantial increase from April 2011. How will this be funded? The Liberal Democrats’ manifesto said it would meet around a third of the cost by giving tax relief on pensions at the basic rate only, which would raise around £5.46bn a year at 2011/12 prices. At the moment, a substantial increase in capital gains tax and changes to national insurance thresholds are being touted as a way to bridge the gap. The coalition agreement is silent on proposals to restrict pensions tax relief.
It’s also emerged that the Government is already reviewing the £600m NEST admin contract (which had been awarded to Tata Consultancy Services in March, more or less in default of no-one else wanting it). Since the Tories have always been a bit unconvinced about NEST, we should keep our eye on this one.
It’s good to see that, after an initial post-election headspin, our newly-weds are beginning to get down to business. An emergency Budget has now been set for 22 June. That should give us more of an idea of where the new relationship is going and we’ll keep you updated if we hear anything on the grapevine in the meantime.
Stephen Beattie is an associate at Allen & Overy LLP.