- Chancellor Rachel Reeves set for key Mansion House speech following protracted climbdown on spending restraints, including Winter Fuel payments
- Reeves’ inaugural Mansion House speech in November paved the way for consolidation and increased investment in UK assets in workplace pensions
- Upcoming Mansion House speech likely to contain details of second phase of Pensions Review, which will look at pension adequacy across ‘three pillars of the UK system – state, occupational and personal wealth’
- Chancellor could outline ISA reform plans, after indicating at the Spring Statement government aims to ‘get the balance right’ between cash and investing
- Treasury to publish policy note setting out proposed changes to the Financial Services and Markets Act 2000 regulations, to enable the introduction of targeted support
AJ Bell head of public policy, Rachel Vahey, says:
“After a bruising few weeks, the chancellor will be hoping to reset the agenda at next week’s Mansion House speech, likely turning her attention to pensions again and trying to persuade voters this government can plot a path toward a more prosperous retirement for millions of Brits.
“Phase two of the government’s Pensions Review will look at adequacy, essentially trying to answer the question of how the UK can develop a future-proof plan for delivering everyone an adequate retirement income.
“It’s now 20 years since the Turner Review was published. That comprehensive look at the UK’s retirement system ushered in a new regime for pensions, resulting in the introduction of landmark automatic enrolment reforms which changed pension saving in the UK forever. A fresh review will need to consider whether those reforms went far enough.
“Since the advent of auto-enrolment governments have largely dodged the question of whether contribution levels are sufficient. Minimum auto-enrolment pension contributions are likely to leave people disappointed in retirement. However, governments have been nervous about raising minimum contribution requirements over fears savers may prioritise jam today and opt-out of their scheme. Likewise, raising employer contribution requirements would likely face a business backlash, with employers having recently shouldered huge rises in the minimum wage and an extra £25 billion a year in national insurance (NI) costs.
“Government has also committed to look at pension adequacy in the round, including the state pension, alongside workplace and private pensions - the ‘three pillars of the UK system’. For over a decade, debate about the state pension has centred on maintaining the triple lock guarantee, now totemic of government support for maintaining pensioners’ living standards.
“But in a damning report this week, the OBR (the Office for Budget Responsibility) claimed the cost of the triple lock has dramatically skyrocketed to around three times more than initial expectations. Thanks to volatile inflation and earnings figures, the triple lock is expected to have cost £15.5 billion each year by 2029-30.
“Making changes to state pensions is a notoriously fraught endeavour, and Labour has already committed to keeping the triple lock during this parliament. But faced with such escalating figures, at a time when fiscal margins are so tight, something may have to give.
“At some point government will need to address the unanswered question of what exactly the policy - which increases the state pension by the highest of rises in prices, wages or 2.5% - is attempting to achieve. Instead, asking what should the state pension be worth and when should people receive it?
“Policymakers will also be mindful of the state pension tax iceberg looming into view, with the full new state pension set to exceed the personal allowance in the next few years. Former Prime Minister Rishi Sunak warned about this ‘retirement tax’ during last year’s general election campaign, with millions of retirees who receive only state pension income at risk of being dragged into paying income tax.
“Labour may be hoping that setting up an independent review on pensions adequacy could create the wiggle room to take politics out of the matter, at least to some extent, and give the job of considering what the state pension looks like beyond the end of the parliamentary cycle to someone else.”
ISA reform
“The other key topic likely to catch the attention of savers and investors is the prospect of ISA reform.
“Government have already committed to addressing what it describes as the balance between cash and equities, clearly signalling it believes more can be done to nudge those with excess savings to invest.
“AJ Bell’s analysis of HMRC figures suggests around £100 billion is held by people with £20,000 or more in Cash ISAs who have not invested a penny in Stocks and Shares ISAs. Millions of people have large cash balances – easily sufficient to serve as a ‘rainy day’ emergency fund – but hold no investments whatsoever.
“Rumours are swirling that the chancellor may seek to reduce the annual contribution permissible in a Cash ISA product, hoping that will encourage more peopling to invest for better long-term returns and bolstering UK capital markets in the process.
“AJ Bell have long argued such rules and restrictions are the wrong way to go. Our research suggests that most savers would simply park their money in taxable savings accounts or NS&I products, with just a fifth (21%) saying they’d invest in the UK stock market instead if the Cash ISA allowance were cut.
“The key to unlocking investment instead needs to involve simplification. Trying to corral consumers into UK investments by introducing new products, restricting Cash ISA limits or introducing mandatory investment quotas will only add complexity and leave consumers lost in an increasingly complex web of saving and investing rules.
“A recent behavioural economics review commission by AJ Bell illustrates the impact divisive choice and friction in the ISA market has on consumer behaviour. Faced with excess complexity, people often choose the path of least resistance in the form of cash saving. Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing, helping to unleash a retail investing revolution.”
Treasury to set out changes to set up implementation of targeted support
“In late June, the FCA outlined its latest plans for targeted support – a new way of giving recommended suggestions to a group of individuals to help them make key financial decisions.
“This major change not only involves the FCA setting out new rules and authorisation requirements for providers. As part of its Mansion House announcements, the government could also set out proposed updates to Financial Services and Markets Act 2000 regulations. This is key step forward toward targeted support becoming a reality, hopefully next year.”
Financial services growth and competitiveness strategy
“The government says it’s committed to boosting growth in the UK by prioritising stability, investment, and economic reform. The financial services sector will be crucial in supporting the economy and making the UK a leading destination for financial services investment
“To achieve this, the government plans to develop a Financial Services Growth and Competitiveness Strategy, which will guide the sector's growth over the next decade. This strategy it hopes will be shaped by contributions from businesses, academia, and other key stakeholders.
“The government launched a call for evidence last November, picking out five key areas of focus to build its strategy to support financial services sector:
- Innovation and technology
- Regulatory environment
- Regional growth
- Skills and access to talent
- International partnerships and trade
“It is entirely plausible that Rachel Reeves will use her Mansion House speech next week to further outline the government’s plans for the sector and details of the growth and competitiveness strategy it has long trailed.”
