Off the back of rigorous research, Hymans Robertson, the leading independent pensions and benefits consultancy, cautions the Government against a shift to a Taxed Exempt Exempt (TEE) pensions system in its response to the Treasury Consultation. Instead it recommends modifying the current system of Exempt Exempt Taxed (EET) by introducing a cap on the rate of income tax relief. This would achieve the Government’s policy objectives with less cost and complexity.

Both focus group sessions and a survey of 2000 people* show that fundamentally changing the tax system by moving to TEE will not strengthen the incentive to save. This is against a backdrop of trillions of assets invested under the current system that would need to be transitioned. This would be complex, costly and could result in a confusing two tier system for individuals and potentially different treatment of DB and DC pensions. 93% of blue chip employers surveyed also favour retaining an Exempt Exempt Taxed (EET) system**.

Commenting on the benefits of a capped rate of relief within an EET system, Patrick Bloomfield, Partner at Hymans Robertson, said:

Of all the options on the table for Government, modifying the current system to bring in a capped rate of tax relief will represent the smallest change for the greatest policy benefit. It would enable the removal or at least a simplification of the complex system of annual and lifetime limits. It will also target pension tax relief at low and middle earners who are currently under saving for retirement. This will be by far the easiest system to implement, as it will dovetail with existing EET savings, leading to lower cost and complexity of change. It will work equally well for public and private sectors and across defined benefits and defined contributions. It has the added benefit of avoiding undermining the Government’s pledge of not changing public sector pensions for the next 25 years.

Clearly any system has to be sustainable, both now and in the future. A capped rate of relief gives the Government an additional fiscal control, introducing a controllable cap on pension tax relief which can be changed independently of income tax bands to help balance the books. It will also provide stable long-term costs as a percentage of GDP. TEE, on the other hand, leads to unstable and rising long-term costs which will ultimately be higher than any equivalent EET regime.

Commenting on the consequences of a TEE shift, Patrick Bloomfield added:

HMT should resist the temptation to boost public finances over the short-term with a move to TEE. It will add significant complexity and cost for no perceivable long-term gain. Aside from rising costs in the future and the burden this places on future generations, our research shows that consumer saving is not incentivised by the pension tax regime itself. But, change and complexity undermine both consumers’ willingness to save and employers’ willingness to provide savings vehicles.

A TEE regime would also be monumentally difficult to implement. We don’t have the luxury of a blank sheet of paper. A move to TEE will result in either the complexity of a two tier system for past and future pension saving, or a transitional ‘tax raid’ on past pensions. It’s difficult to see how this will increase engagement or act as an incentive to save, particularly when only 23% of UK savers feel in control of their pension. Almost half (48%) don’t feel in control because the system changes too much. Instead, it’s likely to contribute to a lack of consumer confidence and engender more distrust of future governments making further changes.

Discussing the costs of a move to TEE, he concluded:

A move to TEE would cost around £2.5-£3bn to industry. This cost would be borne not just by pension providers, but also by businesses who would have to overhaul their systems. It’s vital that the Government doesn’t make it more difficult for employers to provide pensions given how important the workplace is in terms of pension provision. For us, for employers and for consumers, simplicity is key. We need to avoid introducing a two tier system to manage, or indeed separate systems for DB and DC, as this will lead to even more cost and confusion, and ultimately disengagement from saving.

* Focus group studies were carried out in September 2015 by Populus. These findings were then used as the basis for an online survey of over 2000 people were surveyed by Populus between the 18th – 20th September 2015

** Based on poll of 74 blue chip employers participating in Hymans Robertson webinar on 17th September 2015.