Last Wednesday morning the twittersphere was awash with early sightings of the Easter bunny – aka George Osborne’s budget rabbit. The Treasury had helpfully “predicted a surprise” (that’s not a prediction – they had already printed the press notices and the Red Book), and "action for savers" was repeatedly trailed in between the welter of forecasts, help for cathedrals and theatres, and 1p off beer duty.
And when the rabbit finally came it was a big one – new freedoms for pensioners to spend their pension pots, freeing them from the curse of the dud annuity and a raft of other measures to help the savers who had seen their returns dwindle to save the economy through five years of QE. The Opposition was wrong-footed. But the issue became one of trusting the people versus patronising politicians – and nearly 93 years of pensions rules (we give you tax relief if you make irreversible long-term provision for your old age) were blown away at the speed of an accelerating Lamborghini. By Friday, Labour had decided that it needed to get out of the way of that speeding consensus before its electoral prospects with older (more likely to vote) voters were mown down.
We are now promised consultation – not on the policy itself, but on how to put it into law. And then a Pensions Bill to become an Act before the end of the parliament.
The emerging consensus must not prevent proper scrutiny of the policy, its proposed implementation and the actual provisions of the bill.
First, the economics of the change need to be scrutinised. The Treasury assumes that the effect will be to bring forward taxes paid (as people draw down pensions quicker) but that the long-term tax costs are in the distant future. But there are lots of other behavioural changes possible and potential unintended consequences.
Second, the legislation itself will need to be carefully constructed to prevent people tripping around the pension system and collecting tax relief and then cashing out. The final scheme needs to be able to the withstand the whole industry of people looking not just to advise people on sensible choices when they give up working but also on how to exploit the new system to the maximum.
Third, it may be time for a real debate on whether tax free Lamborghinis is the best use of public resources. The tax-free lump-sum is a long-standing feature of the system, described by former Chancellor Nigel Lawson as “a much loved anomaly”. It could just about be rationalised as a sweetener for the deferred gratification of the eventual compulsion to buy an annuity. But there is a question about whether in the long-term this is a good use of public funds: if a minister asked for a public spending subsidy for retirement cruises or fast cars the Treasury would give them pretty short shrift. But this is just another (costly) example of the lower standard of scrutiny applied to so-called “tax expenditures”.
It would be unfortunate if the unveiling of a budget rabbit followed by swift political consensus stifled public debate about whether these changes are the best way of ensuring that people can provide for themselves effectively in old age. And the Pensions Bill itself will need proper technical scrutiny. The desire to legislate before the election probably rules out or severely curtails the opportunity for pre-legislative scrutiny (unless the Treasury already has a draft bill it prepared earlier), though that need not stop either the Work and Pensions or Treasury Select Committee initiating an inquiry now (either jointly or separately). The good news is that the legislation will be separate from the Finance Bill which at least means there is a prospect of some decent scrutiny by the House of Lords, as long as Lords amendments do not fall victim to “financial privilege”.
Budget rabbits are, as we have argued before, the product of the worst sort of closed policy processes. At a Cabinet Office event earlier in the year, Cabinet Secretary Sir Jeremy Heywood was reported as saying that “open policy making was less risky policy making”. Everyone now agrees that pension reforms are important. Genuine open debate and challenge is needed now to ensure that this important reform works.