The UK’s finances are in a dire state. In the first five months of this fiscal year the government borrowed £174 billion. This is far worse than at the height of the global financial crisis in 2010 when the government borrowed £150 billion in 12 months. And it’s not over, as partial lockdowns are being reimposed leading to yet more economic and fiscal pain.
When we eventually get to grips with the health emergency, we know that we are going to be hugely indebted. Quite how much, no one can yet say. And until we know the final cost of Covid, it was wise to cancel the autumn Budget. There is little point in trying to work out how to pay for the fire damage and rebuild, when the firefighters are still in the building, fighting the blaze.
However the nation is already more than £2 trillion in debt and that figure is rising. Our Chancellor will already be scrabbling down the sides of the country’s sofas looking for loose change — and it appears that pensions are in his sights.
Most notably, the triple lock — David Cameron’s promise to increase the state pension every year by inflation, average earnings or 2.5 per cent, whichever is the higher. There has been much comment that Boris Johnson has won this debate with Rishi Sunak, and the triple lock stays. I’m not so sure.
Currently inflation has collapsed to almost zero and wages are actually lower than last year. And so to award pensioners a 2.5 per cent increase in the state pension seems generous compared to the experience of the workers who pay for it through their taxes (and who are also facing mass redundancies).
Wage data is also being distorted by the furlough scheme. Over nine million workers were put on to furlough and some will have received just 80 per cent of their salary, and as furlough tapers off, even less. The latest data showed wages fell 1 per cent compared with last year incorporating the lower wages of those on furlough.
But at some stage those workers still in a job will hopefully get back to 100 per cent of salary, say in late 2020 or 2021. And so the official wage growth data should reflect that and spike higher, to say 5-6 per cent next year. If this happens, pensioners under the triple lock may get a 5-6 per cent pension increase, even though that wage growth is distorted by furlough. So pensioners win no matter what. They get a 2.5 per cent increase when workers see their wages cut through furlough, and also gain the bounce back when workers come off furlough and receive their full salaries.
That seems unfair, and leads Steven Cameron from the financial services firm Aegon to say: ‘We are calling for a sensible compromise. Rather than blindly following the triple lock formula, the government should smooth the distortion of the furlough on earnings growth.’ So maybe pensioners get 2.5 per cent guaranteed over both years? Still good if inflation remains pretty much zero.
What about company pension schemes, public sector schemes and private pensions? There is much speculation that the Chancellor is looking to remove the higher rate pension tax relief. Why do those who earn the most get a larger contribution from the government paid into their pension? It is the lower earners, many argue, who need government support, help and cash to save.
So rather than the government giving you back the tax you would have paid, at 20 per cent, 40 per cent or 45 per cent, depending on how much you earn, the suggestion is that the government contributes 30 per cent to whatever you put into a pension no matter what.
Asset managers Vanguard say: ‘Currently individuals receive tax relief on any pensions contributions they make at the highest rate of income tax they pay. A universal 30 per cent flat rate of pension-contribution tax relief would be more progressive in directing relief to those who would benefit most. Importantly this would be cost-neutral, as well as leaving three quarters of earners better off.’
A flat rate 30 per cent contribution from the government seems more socially fair. And politically reducing the pension benefit of higher-rate taxpayers is also easier to do than breaking the triple lock of the state pension.
But George Osborne looked into this when he was chancellor and the problem is that it is not that easy to do practically, particularly for salary-based pension schemes. The pension received is based on salary earned and assumes a certain level of government contribution. If that changes, who makes up the shortfall?
Rishi Sunak has been a popular chancellor so far as he has splurged money on supporting the economy. But tough choices are to come. Pensions are not such an easy target.