Dr. Barra Roantree:

Where automatic enrolment has been rolled out and where we know it has worked, the tax treatment of pensions has not been changed. It is really the triumph of behavioural economics in that sense. It is the defaulting that shifts people. That is what does the heavy lifting. It has done the lifting in Britain. It has had really big impact there, at least in the short to medium term. We know that is the case in other countries as well. The point is that we do not need to make the change to the tax treatment in order to get those results. Because of the complexity that it potentially introduces and the difficulties with portability, what I outlined earlier and what I have quite a strong view on is that this is something we could come back to in the future, after automatic enrolment is rolled out, if there are groups that we think are still under-saving. Then something like what is being described, an SSIA-type top-up could work quite well. It can be targeted more towards the groups that are still not participating. For me that is the important point. I am glad to discuss it further. Auto-enrolment works because it changes the default, not because of the tax treatment. The evidence, a lot of which we cited in the opening statement, is very clear in that regard.

The actual tax treatment of pensions is a remarkably complex area. Our scheme, which can be broadly applied, is called the EET scheme. We have that tax treatment in common with many advanced economies. There are a lot of good features to it. Essentially, that system is neutral between consumption today and consumption in the future. That is something we see as economically desirable, namely, that you do not have the tax system distorting consumption towards wanting people to consume today or in the future. Another important part of the argument is that it is neutral between different types of pension saving products. When we talk about changing the system of marginal rate relief, that affects defined contribution pensions. It is very difficult for it to affect defined benefit pensions.

In a scheme like that proposed in the draft heads, we would effectively have blended marginal rate relief for a subset of private sector employees, with some of them in the existing system, and defined benefit schemes, primarily comprising public sector pensions, would remain in the EET system. We would have quite a degree of difference between the tax treatment of each of those pension schemes. We know that people move between jobs and between the public and private sector. I would worry about the consequences of that in the future. I do not think it has necessarily been addressed. One of the heads states that they might look at getting the CPA to research issues relating to portability in the future. Those are issues that could be clear at the outset regarding what is going to happen down the line. People's earnings change over time. Some people would find the proposed system beneficial at certain points in their lives and the existing system beneficial at others. There are serious issues around portability that should be thought through and worked out. I am not sure they necessarily have been to date. Setting aside the change to the tax relief would avoid having to confront a lot of those issues because portability would be maintained. From that point of view, there is a lot to be said for separating out the issues of automatic enrolment and the changes to tax relief.