Ros Altmann: It’s not too late to think again.
The government should ‘press the pause button’ on ‘premature and ill-conceived’ legislation to implement the £2,000 cap on salary sacrifice, Baroness Ros Altmann says.
The former pensions minister said legislation to implement the cap - the National Insurance Contributions (Employer Pension Contributions) Bill – is currently going through the House of Lords, with a vote by peers due on Thursday (5 March).
But Altmann said House of Lords scrutiny had found that the legislation was "not clearly thought through" – adding that, as the cap is not due to begin until 2029, the legislation should be paused to allow more time to get it right.
Altmann said: "The measures are clearly not properly thought through, and we have raised absolutely vital questions which remain unanswered. The measures could have damaging consequences and the Bill should be put on hold until the government gives us a better idea of how they will operate."
The peer cited examples of some of the "gaping holes" in the legislation, outlining some of the questions the government needed to answer.
One area where she said clarity was needed was around whether employers would be able to increase pension contributions safely.
She said it had not yet been clarified what is actually caught by the Bill in terms of how a salary sacrifice optional remuneration arrangement will be assessed – asking whether, for instance, an employer increases workers' pension contributions, just because perhaps they feel they want to provide more for their staff than current minimal levels.
Altmann said HMRC may decide to consider this salary sacrifice, even if it is not – with the result that employers will be reluctant to increase their contributions at all, just in case they are caught.
She said other key questions included what happens to people with multiple jobs?, what if workers change jobs part-way through the tax year?, what about student loan costs?, and who is responsible for compliance? For reporting to HMRC?
Unknown impact
Altmann also noted that so many unknowns seem to be skirted over and there is "no reliable modelling of likely impacts".
She said: "The government has not shown how workers will react to falling take-home pay when losing salary sacrificed pension benefits. A quarter of those losing out will be basic rate taxpayers, so will this increase pension inequality? By how much?"
Altmann also said it was unknown how employers would react as well – noting that those paying above the auto-enrolment minimum, could reduce future contributions to offset higher NI costs, but adding that those already contributing at minimum levels would not have this option.
She said there was no modelling to quantify how the higher costs for these businesses might affect future pay rises and staffing levels.
Altmann also noted the extra administrative costs and complexity involved in implementing the cap – saying employers will have to pay more for administration costs, changing payroll software, revising pension scheme rules and renegotiating contracts of employment.
She said smaller and medium-sized employers could be severely hit by these factors – but added that, once again, there was "no modelling" to show the scale of the issue.
Policy inconsistencies
Altmann admitted there could be a case made that such a cap could even out the relative generosity of pension incentives, but said "this is definitely not the way to do it" – noting the measures would hit basic rate taxpayers too, as well as moderate earners, who could lose out more than higher earners.
She said: "To remedy some of the inequalities in pension provision, one would need to improve the incentives for basic rate taxpayers, not reduce them! Worsening lower or middle earners' incentives can only worsen their pension outcomes."
Ultimately, Altmann believes the Bill highlights "major inconsistencies" in current pension policy, particularly in the private sector.
She said: "Stated policy objectives of helping workers achieve better pension outcomes and encouraging more pension fund investment in UK assets, will actually be undermined by these reforms.
"Higher pensions for ordinary workers and more pension support for long-term UK growth, require higher contributions. We even have a new Pension Commission examining ways to boost pension adequacy. Surely the last thing we should do is put workers or their employer off increasing pension contributions - or drive lower contributions. Yet, that will be the result of this policy."
Altmann added: "It's time to press the pause button and think carefully about how to reform pensions, without damaging outcomes for middle earners. It's not too late to think again."
