Redington tax consultation response - A worker's pension tax free for life

Redington Response Strengthening the Incentive to Save September 2015
Strengthening the incentive to save:
A consultation on tax relief
Redington response – A worker’s pension that is tax free for life
September 2015
1

Redington Response Strengthening the Incentive to Save September 2015 2
Contents
Section Page
Executive Summary 3
Why are we making this response? 7
Our proposal to increase the probability of “most people” achieving a “living wage” income in
retirement by 2035
10
What are the practical considerations? 18
Why we don’t recommend a wholesale change to a T-E-E framework 20
Specific consultation Q&A 22

Who is Redington?
3
• Background on firm as an independent institutional investment consultant. No vested interest in this response.
Executive Summary

Executive Summary
» Redington is making this response as an independent firm with no direct commercial interest in the outcome of the consultation.
» Our response builds on the research and views set out in the Age of Responsibility report designed and edited by Redington and Lord
Hutton of Furness, working in conjunction with experts from a diverse range of fields relevant to the retirement and savings challenges we
currently face (http://aor.redington.co.uk).
» We have also applied our experience in helping our clients (institutional investors) make effective and timely decisions in the face of high
levels of complexity, ambiguity and uncertainty.
What is the objective?
» We believe that for effective decision making you must set out a clear objective that is Specific, Measurable, Achievable, Realistic and
Time-bound (“SMART”).
» In the absence of having a SMART context or objective provided by HM Treasury in the consultation document, we have adopted the
following objective for our response to this consultation:
Any change to our savings system needs to increase the probability of
“most people” in the UK achieving a “living wage” income in retirement by 2035
» Applying a different context would lead us to make a different set of proposals.
How can this be achieved?
» In considering the effectiveness of potential solutions to meeting this objective we have also applied the E.A.S.T framework developed by
the Behavioural Insights Team “BIT”, who contributed to the Age of Responsibility report (Chapter 2). BIT advocate that when attempting
to influence behaviour, propositions should aim to be Easy, Attractive, Social and Timely.
» In the world of pensions and saving, Auto-Enrolment has been the most influential change on low-to-median income workers as evidenced
in the consultation document. Auto-Enrolment takes advantage of the power of defaults (Easy) and the influence other people have on our
actions (Social – “we’re all in”).
» As such, we support the consultation document’s suggestion that any potential changes build on the success of Auto-Enrolment.

Executive Summary
5
What is our proposal?
» Our proposal is that HM Treasury make the auto-enrolled pension more effective in meeting the given SMART objective by doing the
following:
1. Putting more in when working → Continue to raise the aggregate contribution rate from auto-enrolment to 8% in 2018, and,
subject to a close monitoring of opt-out rates, go incrementally further to at least 10%.
2. Getting more income at retirement → A worker’s pension that is tax free for life “E-E-E”. Remove tax on income in retirement from
the auto-enrolled pension. This would make the target income easier to achieve. It should also make the auto-enrolled pension
more attractive and thereby reduce opt-out rates.
3. Improve affordability for Government and employers → Allow for a tax exemption on retirement income by limiting the aggregate
auto-enrolled contribution (or Annual Allowance) to £5k per annum. This cap would also reduce the cost of auto-enrolment on
employers from higher income employees, making increases in auto-enrolment rates more affordable. If necessary from a public
cost perspective, also move to a flat rate of tax relief. Based on current UK incomes (source: HMRC), a £5k allowance would allow
over 90% of people to save 10% towards their pension.
4. Go further for those who can afford it → Encourage retirement savings above this cap through ISAs on a “T-E-E” framework. Take
advantage of the relative simplicity and flexibility (Attractive) of ISAs but make them easier to access through the workplace with
employer default ISAs (Easy and more Social). In addition recognise savings needs at different stages of life by applying “top-ups”
that are purpose focused (more Timely), replicating the popularity of pensioner bonds and the anticipated popularity of “Help to
Buy” ISAs.
5. Stay on track -> Put in place an independent pensions commission with a clear mandate to review and adapt the contribution rate,
contribution cap, and access age as required in order to meet the stated objective. Measure progress in the context of the 2035
target.
» We believe that this proposal meets the SMART objective we have articulated and builds on the developments within the pensions
and savings system that have been proven to work most effectively.

Why we don’t recommend a whole-sale change to T-E-E
» Alternative solutions to the current system include a wholesale move to a “T-E-E” tax system and enabling retirement savings through
an ISA-like framework. Although arguably simpler, this change may not meet the objective outlined above as it runs the following risks
• Reduction in aggregated savings for most people due to the impact on the employer contribution.
• Inconclusive evidence that such a change, even with a top up, would be as effective as auto-enrolment.
• Complexity may not be materially reduced once a restriction on spending until retirement is applied.
• Further widen the inequity in the current system between the tax treatment of Defined Contribution (“DC”) and Defined Benefit
(“DB”).
Executive Summary

Who is Redington?
7
Why are we making this response?

Why have we submitted this response?
» In the interests of clarity, we can confirm that Redington has no direct commercial interest in the outcome of this response.
» Our purpose is to transform peoples experience of pensions and savings from fear and uncertainty to clarity, confidence and control.
» Our clients include pension schemes, wealth management firms, insurance companies and charities.
» We believe that our understanding of our clients
gives us a useful vantage point when considering
the issues that need to be dealt with in this
consultation.
» In 2013 we founded a financial education charity
initiative for young people called RedSTART.
» RedSTART has delivered high impact financial
education to over 1,000 young people in London,
Brighton, Edinburgh and Bristol. Our long term
goal for RedSTART is to deliver financial
education to 1 million young people by 2025.
» We feel a responsibility as savings industry
participants and financial education providers to
engage in debates such as this and help to shape
the future for savings.

What is the background to this response?
9
Our response builds on the research and views set out in the Age of Responsibility report, designed and edited by
Redington and Lord Hutton of Furness. In this report we worked with experts from a diverse range of fields relevant
to the retirement and savings challenges we currently face (http://aor.redington.co.uk/).
Background to the report
» The Age of Responsibility report was published in March 2015. The aim of the report was to provide clear calls
to action on how to address the current retirement savings challenges faced by our society.
» Experts from across the pensions and savings industry, and wider fields, including education, policy and
behavioural research contributed their views on the current landscape and how it could evolve to improve
outcomes for savers.
» The report uncovered powerful facts on the scale of the ‘pensions crisis’ and how the industry can adapt to
engage people in retirement savings and improve their outcomes.
What are the key issues?
1. The UK has an aging population: The share of the UK population over 80 years old has increased by 400% since
1970. 17% of UK GDP is currently spent on age related expenditure. This is set to increase to over 20% by 2060
(Source: Credit Suisse – Age of Responsibility report)
2. Old-age dependency ratio (“OADR) is rising: According to the ONS, the OADR was steady at around 300 from the
1980s to 2006, but rose in 2007-09 as women born in the post-World War II baby boom reached State Pension
Age (“SPA”). Following the SPA increases taking place between 2010 and 2046 under current legislation, it is
expected that by 2037, for every 1,000 people of working age, there will be 365 people of SPA.
3. Savings rates are too low: The current household savings ratio in the UK is 5% (Source: ONS). This is low
relative to historic UK savings levels (which peaked at around 12% in 1980 and 1991). This savings level is
similar to the US but low compared to other European countries (c.10%), and compared to the high savings
culture in China (c.25-35%). The auto-enrolment cap is currently 8%, however, evidence in our Age of
Responsibility report suggests individuals will have to save at least 15% of their income throughout their working
life to maintain their standard of living in retirement.
Note the parties above were not involved in this response.
Contributing Experts

Who is Redington?
10
Our proposal: To increase the probability of “most people”
achieving a “living wage” income in retirement by 2035

What is the objective we have in mind for any potential changes?
11
Starting with the end in mind
Why is context important?
» Being clear on the context is important when faced with complexity, ambiguity and uncertainty.
» Understanding the context clearly allows you to set objectives that are Specific, Measurable, Achievable, Realistic and Time-
bound “SMART”.
» A robust decision making framework can then be designed around these SMART objectives to assess the impact of an
action or proposal.
» This mind-set and approach has been instrumental in the successful outcomes achieved by the clients we advise.
What is our objective for change?
» Our view is that, whilst the background provided in the consultation report is informative, it does not provide a “SMART”
objective that confirms what the Government is trying to achieve.
» As such, we have proposed the following objective for changing the current pensions system, which is supported by the
findings set out in the Age of Responsibility report:
We believe any changes to the pensions system needs to increase the probability of
“most people” achieving a “living wage” income in retirement by 2035”
» Through setting this objective we now have a clear end goal within which different proposals can be assessed.
» If this objective is not in line with the Government aims, then our proposal is unlikely to be the right solution.

How can behavioural research help us to achieve this objective?
12
Using behavioural biases to encourage engagement in pensions and saving
EAST Framework:
» Behavioural biases implicit in human behaviour may be to blame for the lack of engagement in pensions and savings however,
evidence suggests we can use these biases to encourage better outcomes for savers.
» The Behavioural Insights Team (BIT) believe a solution to the current retirement savings challenges must be Easy, Attractive, Social
and Timely to get real engagement.
• Prompt when
most relevant
• Immediate
cost and
benefit
• Help to plan a
response to
events
• Simplify
messages
• Harness power
of defaults
• Reduce “hassle
factor”
• Attract
Attention
• Apply rewards
and sanctions
• Show most people
do it
• Use networks
• Make commitment
to others

How has EAST been used to improve outcomes to date?
13
» In the area of UK pensions and savings by far the most effective change to behaviour and encourage savings has been the
introduction of Auto-Enrolment with an additional 5 million savers contributing to a pension as a result.
» Auto-enrolment benefits primarily from being “Easy”, taking advantage of the power of defaults. There is academic research based
on the Danish pension system which highlights the greater effectiveness of passive or automatic saving policies, compared to active
or incentivised saving initiatives (http://www.rajchetty.com/chettyfiles/crowdout_CfRR_article.pdf).
» Whilst we don’t yet have the evidence, we can also assume that one of reasons for the success of auto-enrolment, specifically with
regard to the low “opt-out” rates, has been the “Social” aspect – knowing that everyone else is doing it, as emphasised in the “we’re
all in” marketing campaign.
» Increasing the Attractiveness and Timeliness of pension saving should be a goal but not at the detriment of the effectiveness of the
current auto-enrolment framework.
» The simplicity and flexibility of saving in an ISA appears to be “Attractive” particularly with younger people. 13 million ISAs and
500,000 Junior ISAs were opened last year (source: HMRC).
» Purpose led, incentivised schemes such as Pensioner Bonds have resulted in higher saving rates through being “Timely” with more
than 1 million savers buying these bonds (source: HMRC).

Who are the “most people” we have in mind in our proposal?
14
Who are “most people”?
» The stated objective for our proposal refers to “most people”.
» To define “most people” on an ongoing basis, we can monitor the distribution of incomes in the UK.
» In our view most people could be taken as those people falling below the 90th percentile of incomes.
» Therefore our proposal is focused on pension system and tax changes that are beneficial for those earning £50k a year or less.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97
Current Distribution of UK Incomes (Tax Payers Only)
Percentile
Income p.a.
£50k
90th
Source: HMRC, 2012-2013

» We recognise that the new State Pension of £151.25 per week (£7,865 per year) has been designed with poverty prevention in mind. In
a post Defined Benefit (“DB”) world, those who work all their lives will need to fall back on accumulated private savings to cover the costs
of living over and above this basic underpin.
» The current “living wage” has been set in relation to the cost of living. In the UK (outside of London) this is currently set at £7.85 per hour
(source: www.livingwage.org.uk). This equates to annual income of approx. £14.5k a year (net of income tax).
» Allowing for inflation, a person would require a pension pot of about £200k to afford annuity which provides the equivalent of the living
age, after tax, when combined with the State Pension. [Index linked single life annuity with £200k = £7.6k p.a. Total pension (gross of tax)
= annuity + state = £7.6k + £7.9k = £15.5k p.a. Therefore total pension (net of tax) = £14.5k]
» The contribution rates required to reach this £14.5k p.a. after tax for different salaries and starting ages are set out below:
» The implication of the table above backs up (albeit simplistically) the research contained within our Age of Responsibility report that even
the ultimate Auto-Enrolment (“A-E”) target rate of 8% is unlikely to be enough to provide even a modest standard of living in retirement.
» Our proposal therefore calls for increasing the auto-enrolment rate (unless opt rates start increasing dramatically).
» We also propose reducing income tax in retirement (reducing the required contributions for a given target) to allow people to get more out
of their savings in retirement.
What is the “living wage” in retirement, and what contribution rates are required to achieve it?
15
Assumes salary and contributions increase with inflation, 4.5% nominal investment return, 2.5% inflation, and retirement age of 68. green cells indicate where the 8% A-E rates will be
sufficient, amber where 1% short, red cells indicate where it is more than 1% short.
Contributions required for a retirement income of £14.5k (NET tax)
Salary
Age started
saving £20,000 £30,000 £50,000
20 12% 8% 5%
30 17% 12% 7%
40 26% 18% 11%
50 45% 30% 18%
60 112% 75% 45%

What is our proposal to meet the stated objective? (1/3)
16
» Our proposal is that HM Treasury make the auto-enrolled pension more effective in meeting the stated SMART objective by doing the
following:
1. Putting more in when working → Raise the aggregate contribution rate from auto-enrolment to 10%
• From 8% in 2018, to 10% shortly thereafter and ideally up to 15%
• Use evidence of opt-out rates (or controlled testing) to gauge ability to raise these rates further, stopping before opt-outs
pick up markedly
• Each increase reduces risk of under-saving and makes target income more achievable
2. Getting more income at retirement → A new worker’s pension that is tax free for life “E-E-E”.
• Remove tax on income in retirement from the auto-enrolled pension.
• This would make the target net income easier to achieve.
• It should also make the auto-enrolled pension more attractive, helping to keep opt-out rates from rising and makes planning easier.
Assumes salary and contributions increase with inflation, 4.5% nominal investment return, 2.5% inflation, and retirement age of 68. green cells indicate where the 8% A-E rates will be
sufficient, amber where 1% short, red cells indicate where it is more than 1% short.
Contributions required for a retirement income of £14.5k (NET tax)
Indicating whether 8% A-E Rate is sufficient
Salary
Age started
saving £20,000 £30,000 £50,000
20 11% 7% 4%
30 15% 10% 6%
40 23% 15% 9%
50 40% 26% 16%
60 98% 65% 39%
Salary
Age started
saving £20,000 £30,000 £50,000
20 12% 8% 5%
30 17% 12% 7%
40 26% 18% 11%
50 45% 30% 18%
60 112% 75% 45%
Contributions required for a retirement income of £14.5k (GROSS tax)
Indicating whether 10% A-E rate is sufficient
» The impact of these first two changes on required contributions to meet the living wage income target (but now gross of tax) is set out
below right and compared against the required contributions under the current system (below left):
After Changes

What is our proposal to meet the stated objective? (2/2)
17
3. Improve affordability for Government and employers → Reduce the Annual Allowance on this pension to £5k per annum.
• We believe that capping the aggregate auto-enrolment contribution at this lower level would provide material cost savings for the
government relative to the current system
• We believe that there should still be a net saving even if factoring in subsequent tax foregone on the retirement income taken from these
savings (although we have not carried out this modelling)
• This cap would also reduce the cost of auto-enrolment on employers from higher income employees, making increases in auto-enrolment
rates more affordable.
• Further savings could be gained for HM Treasury, if required, without working against the stated objective by moving to a flat rate of tax
relief.
• This cap can be adjusted in line with the auto-enrolment % rate and distribution of UK incomes – e.g. based on current UK incomes (source
HRMC 2012-2013), a £5k allowance would enable over 90% of people to save 10% towards their pension.
4. Go further for those who can afford it → Encourage additional retirement savings above this cap through ISAs.
• Take advantage of the relative simplicity and flexibility (Attractive) of ISAs
• Make them easier to access through the workplace with employer default ISAs (Easy and more Social).
• Recognise savings needs at different stages of life by applying “top-ups” that are purpose focused (more Timely), replicating the popularity
of pensioner bonds and the anticipated popularity of “Help to Buy” ISAs.
5. Stay on track -> Put in place an independent pensions commission with a clear mandate to meet the stated objective.
• This commission will have responsibility for managing the inter-generational trade-offs associated with pensions policy.
• It could review and adapt the contribution rate, contribution cap, and access age as required outside of short term political influence.
• It’s performance can be assessed objectively by measuring progress in the context of the 2035 target.
» We believe this proposal meets the SMART objective we have articulated and builds on the developments within the pensions and savings system that
have been proven to work most effectively.

Who is Redington?
18
What are the practical considerations?

What are the practical implications of introducing an E-E-E pension?
19
» We recognise that any practicalities and costs of making changes to the current pension system will need to be carefully considered
with any potential second order effects or unintended consequences clearly mapped out.
» That is we believe any potential changes need to be considered with a long term frame of mind (hence the 2035 context we applied).
» Sensible phasing and sign-posting well in advance can reduce costs, allow consensus to be built and help with planning.
» We believe that the proposals set out in this response document call for extensions and enhancements to the current pension
system rather than wholesale change or upheaval.
» However an E-E-E pension system could be affordable for the government only if combined with a lower annual allowance. So its
introduction will require integration with or management alongside existing E-E-T DC savings or DB accrual.
What would happen to existing pension savings?
» We would not recommend that DC pension savings already built up or DB accrual should be simply converted to tax exemption on
retirement.
» These existing savings and accrual could be allowed to run off or alternatively apply a suitable transparent conversion framework
based on value of pension saving and age.
» For smaller sums a 1 for 1 conversion may be allowed, helping to incentivise the consolidation of small legacy pots (into the new E-E-
E pension vehicle.
What about Defined Benefit accrual?
» Defined benefit accrual would also be subject to the £5k annual allowance helping to mitigate the cost of this form of benefit to
private and public employers would still provide it.
» The benefit of retaining tax relief on contributions will allow most DB accrual to be built up without incurring a tax liability on scheme
members (which may vary with real yield levels).

Who is Redington?
20
Why not move pension savings to a T-E-E/ISA framework?

Why not move pension savings to a T-E-E/ISA framework?
21
Very long term incentives may not be effective
• We do not have evidence that a T-E-E system, even with top-ups, will increase savings for very long term goals such as retirement income relative
to the current system
• There is precedence of “top up” T-E-E savings initiatives being popular, such as the SSIA (“Special Savings Initiative Account”) Scheme in Ireland
launched in 2001. However these initiatives have typically been over relatively shorter time horizons such as 5 years.
A lifetime ISA system may be just as complex
• A case for an ISA type of pension saving system is also based on making it easier to understand and simpler. However once a form of restriction is
introduced to link those savings (or incentives) to access only in retirement, then similar levels of complexity to the current system may be
involved.
Risk that it lowers the level of savings due to the treatment of the employer contribution
• Employers can currently use E-E-T pension contributions as a way of paying employees without a tax or national insurance bill (for either side). If an
employer makes a DB pension contribution it is treated as a tax free benefit. Employers can use salary sacrifice to convert even more income into
saving. Under auto-enrolment the employer’s contribution of 3% along with the basic tax relief of 1%, doubles the 4% employee contribution. If we
moved to a T-E-E framework, there is a danger, even with an increased govt. top-up of say 33%, that the final amount ultimately saved is less.
• Even if the employer contribution is maintained, under a T-E-E system this payment would be taxed upfront, and this tax liability may be
substantial. For example the annual cost of accrual for the Bank of England scheme is 51.8%. For a 40% tax payer this would lead to an annual
tax bill of over 20% of pre-tax salary. Similar effect for DC pension schemes. Saving a pound via company contributions gives an upfront tax bill of
20 to 45 pence (depending on tax rate). This would be an upfront incentive not to save.
DB and DC pension saving and benefits should be treated equitably from a tax perspective
• A way around some of the complications of the introduction of a T-E-E system would be to leave the tax treatment of DB pension schemes and its
members unchanged.
• However this would further increase the inequity of tax treatment already in the current system rather than help addressing it. For example,
currently, the Lifetime Allowance (“LTA”) multiplier (20) is lower in DB when compared to an annuity multiplier (currently approx. 26). Therefore the
LTA allows DB members to enjoy up to 30% more gross income than DC savers in retirement.
• Schemes still open to DB accrual are predominantly in the public sector so different tax treatments across DB and DC could effectively result in a
different tax treatment between public and private sector employees.

Who is Redington?
22
Specific Consultation Q&A

Consultation Questions
1. To what extent does the complexity of the current system undermine the incentive for individuals to save into a pensions?
» We agree that the current system is complex and that simplification would make pension saving easier. However there are many factors,
in addition to complexity, undermining the incentive for individuals to save. As an example, we set out below, three key challenges
faced, particularly by young people, when it comes to retirement savings:
1. Lack of understanding – Most people don’t know how much they need to save for retirement. Many people who save in Auto
Enrolment at the default level, currently 3%, believe they are saving enough, whereas evidence suggests at least 15% is required
(MRM & pfeg - Age of Responsibility report). Added to which, research suggests that young people were more likely to understand a
foreign language than basic financial terms (source: MRM - Age of Responsibility report). Lack of clear direction and
communication may have led to a reluctance to commit money into the current pensions system.
2. Lack of flexibility –The current system is too inflexible for the needs of young people (MRM - Age of Responsibility report). Young
people have financial goals that are prioritised over retirement savings, such as buying a house. The illiquidity of pensions saving,
combined with low financial capability, reduces the incentive for people to save in a pension.
3. Lack of certainty – There is no guarantee that pension policy changes won’t have a perceived negative impact on savers in future.
As discussed by the Pensions Policy Institute (“PPI”), changes to pensions policy can undermine confidence and trust in the system
however, for policy makers have both short term and long term incentives which have to be balanced (source: PPI - Age of
Responsibility report). This lack of certainty, and the inflexibility during the accumulation phase, may dis-incentivise people from
saving in a pension.

2. Do we believe that a simpler system is likely to result in greater engagement with pension saving? If so, how would the system be
simplified to strengthen the incentive for individuals to save into a pension?
» Simplicity is a means to an end rather than a solution in itself. In the absence of having a clear and specific end in mind for this
consultation, we have proposed that any potential changes are considered against an objective to:
» Simplicity itself should not be sought at the detriment of achieving this objective.
» We propose developing solutions that are Easy, Attractive, Social and Timely, which can influence human behaviours and encourage
greater engagement in retirement savings (source: Behavioural Insights Team). Simplicity is just one element of this (Easy).
» An example of how the EAST framework has been successful in pensions and saving is the Auto-Enrolment scheme. Auto-Enrolment has
been the most influential change on low-to-median income workers as evidenced in the consultation document, despite the underlying
complexity within the pensions system. It also takes advantage of the power of defaults (Easy) and the power of social norms with the
“we’re all in” marketing campaign (Social). We support the consultation document’s suggestion that any potential changes build on the
success of Auto-Enrolment to further increase engagement in retirement savings.
» As outlined in our proposal, we believe a change that achieves the stated objective and increases simplicity would be to make the Auto-
Enrolment pension tax free for life or “E-E-E”. This would make tax planning for retirement easier and more straight forward. It would
also avoid the complexity and administrative burden caused by the crystallised and/or non crystallised lump sum withdrawals.
increase the probability of “most people” in the UK achieving a “living
wage” income in retirement by 2035

3. Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement,
particularly in the context of the shift to defined contribution pensions? If so, how should each be treated?
» In the context of the objective stated in Question 2, we propose an alternative system, outlined below, that increases the probability of
“most people” in the UK achieving a “living wage” income in retirement by 2035.
» As set out in our proposal, we believe that purpose focused ISAs can empower and influence people to take responsibility for savings
above this minimum level to meet their retirement income goals.
» Our proposal is that HM Treasury make the auto-enrolled pension more effective in meeting the objective above by doing the following:
1. Putting more in when working → Continuing to raise the aggregated contribution to 8% in 2018, and subject to a close monitoring
of opt-rates go incrementally further to at least to 10%
2. Take more income at retirement → A workers pension that is tax free for life “EEE”. Removing tax on income in retirement taken
from the auto-enrolled pension to make the target income easier to achieve. This could make auto-enrolment more Attractive and
thereby reduce opt-out rates.
3. Improve affordability for Government and employers → limit the aggregate auto-enrolled contribution (or Annual Allowance) to a
moderate £5k and, if necessary from a cost perspective, move to a flat rate of tax relief. Based on current UK incomes £5k
allowance would enable over 90% of people to save a 10% contribution (ONS, 2015).
4. Go further for those who can afford it → Help to foster a culture of savings and enable retirement savings above this cap through
ISAs on a “TEE” framework by taking advantage of its relative simplicity (Easy) and flexibility (Attractive) but make them more Social
and Timely by being purpose focused i.e. “Workers ISA” – replicating the popularity of pensioner bonds and “Help to Buy” at other
stages of life.
5. Stay on track -> Put in place an intendent pensions commission with a clear mandate to achieve the objective by governing over
the appropriate contribution rate, contribution cap, and retirement age. Measure progress in context of the 2035 target.

4. Would and alternative system allow individuals to plan better for how they use their savings in retirement?
» The alternative system proposed in Question 3 helps to provide individuals with a safe guard of the minimum requirement for a
retirement income to cover the costs of living.
» Added to which people have greater flexibility on how they choose to save above this level through in an ISA style account. On this they
would be able to adapt their savings/investments to meet personal goals and objectives for their retirement income.
5. Should the government consider differential treatment for defined benefit and defined contribution pensions? If so, how should each be
treated?
» In the current system there is inequity between DB and DC savers – the Lifetime Allowance multiplier (20x) is lower in DB when
compared to an annuity multiplier (c.26). The true economic cost of accrual for purposes of the £40k to £10k annual limit is also
subject to a lower multiplier than an equivalent annuity.
» We do not believe there should be an inequity of tax treatment between DB and DC pensions and any changes to the tax treatment
should be made fairly across both.
» To build on our proposed changes to the current system outlined in Question 3, we suggest defined benefit accrual would also be
subject to the £5k annual allowance helping to mitigate the cost of this form of benefit to both private and public employers.
» We would not recommend that either DC pension savings already built up or DB accrual should be simply converted to tax exemption on
retirement.
» These existing savings and accrual could be allowed to run off or alternatively apply a suitable transparent conversion framework based
on value of pension saving and age.
» For smaller sums a 1 for 1 conversion may be allowed, helping incentivise the consolidation of small legacy pots.

6. What administrative barriers exist to reforming the system of pensions tax, particularly in the context of automatic enrolment? How could
these be best overcome?
» We recognise that any practicalities and costs of making changes to the current pension system will need to be carefully considered with
any potential second order effects or unintended consequences clearly mapped out.
» That is we believe any potential changes need to be considered with a long term frame of mind (hence the 2035 context we applied).
» Sensible phasing and sign-posting well in advance can reduce costs, allow consensus to be built and help with planning.
» We believe that the proposals set out in this response document call for extensions and enhancements to the current pension system
rather than wholesale change or upheaval.
» However an E-E-E pension system could be affordable for the government only if combined with a lower annual allowance. So it’s
introduction will require integration with or management alongside existing E-E-T DC savings and E-E-T DB accrual.

7. How should employer contributions be treated under any reform of pensions tax relief?
» In light of the objective we have set for our proposal, any changes must ensure that for most people the total amount saved is not
reduced. A key part of this is to maintain the incentive for employers to contribute to pension savings.
» Employers can currently use E-E-T pension contributions as a way of paying employees without a tax or national insurance bill (for either
side). If an employer makes a DB pension contribution it is treated as a tax free benefit. Employers can use salary sacrifice to convert
even more income into saving.
» Under auto-enrolment the employer’s contribution of 3% along with the basic tax relief of 1%, doubles the 4% employee contribution. If
we moved to a T-E-E framework, there is a danger, even with an increased govt. top-up of say 33%, that the final amount ultimately
saved is less.
» Even if the employer contribution is maintained, under a T-E-E system this payment would be taxed upfront, and this tax liability may be
substantial. For example the annual cost of accrual for the Bank of England scheme is 51.8%. For a 40% tax payer this would lead to an
annual tax bill of over 20% of pre-tax salary. Similar effect for DC pension schemes. Saving a pound via company contributions gives an
upfront tax bill of 20 to 45 pence (depending on tax rate). This would be an upfront incentive not to save.
» We believe that employer contributions should continue to be paid in line with Auto-Enrolment but with a target total contribution rate of
10% (rather than the current 8%) and an overall cap at £5k p.a. This ensures that employers and employees continue to benefit from
tax savings on their contributions, but that the overall level of tax relief is capped.
8. How can the government make sure that any reform of pensions tax relief is sustainable for the future?
» We propose that the government put in place an independent pensions commission with a clear mandate to meet the stated objective.
» This commission will have responsibility for managing the inter-generational trade-offs associated with pensions policy, recognising
sustainability when it comes to pensions and associated tax relief needs to be considered both in the short term (budget deficits) and
long term (economic implications).
» It could review and adapt the contribution rate, contribution cap, and access age as required outside of short term political influence.
» It’s performance can be assessed objectively by measuring progress in the context of the 2035 target and measures of public finance
sustainability.

Austin Friars House, 2-6 Austin Friars, London EC2N 2DB Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Contacts & Disclaimer
Patrick O’Sullivan
Director | Investment Consulting
Direct Line: 020 3326 7104
patrick.osullivan@redington.co.uk
Robert Gardner
Founder and Co-CEO
Direct Line: 0207 250 3416
robert.gardner@redington.co.uk
Disclaimer
For professional investors only. Not suitable for
private customers.
The information herein was obtained from various
sources. We do not guarantee every aspect of its
accuracy. The information is for your private
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variety of market factors and assumptions may affect
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possible loss scenarios. There is no certainty that the
parameters and assumptions used in this analysis
can be duplicated with actual trades. Any historical
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12
Tara Gillespie
Associate | Investment Consulting
Direct Line: 0203 326 7107
tara.gillespie@redington.co.uk
Kristina Beconiene
Analyst | Investment Consulting
Direct Line: 0203 326 0839
Kristina.beconiene@redington.co.uk

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