Triple lock, NHS and merging regulators on Liz Truss’s agenda

Truss’s success was announced on September 5, with the foreign secretary beating Rishi Sunak in a ballot of Conservative party members by 81,326 votes to 60,399 — a 57 per cent to 43 per cent victory.

Truss had initially said she would publish an emergency budget in late September, though this has since been downgraded to a “fiscal statement” or “fiscal event”, reportedly in order that the government does not have to ask the Office for Budget Responsibility to produce a new set of forecasts.

The former foreign secretary campaigned on promises to cut taxes, but with inflation soaring, the cost of living crisis mounting, and suggestions that she may concede to demands for an energy price freeze and financial support to some (or all) families and businesses, questions have been raised about whether there is sufficient fiscal headroom to pursue both policies simultaneously.

Assuming she sticks to her guns and the triple lock remains in place, retirees could receive a huge boost to their incomes next year

Tom Selby, AJ Bell

Rate rises, inflation and triple lock

Much attention has been paid to the prospect of future interest rate rises by the Bank of England in a bid to combat inflation. The BoE has estimated that inflation could top 13.3 per cent in the fourth quarter of this year, but forecasts that it will begin to decrease to around 2 per cent in two years’ time.

Critics, however, have pointed out that the central bank has consistently underestimated the rate of inflation, and Citigroup has warned it could in fact rise to as high as 20 per cent in January.

Plans to borrow more money to support people through the cost of living crisis could necessitate further rate hikes by the BoE, while Truss has yet to provide details on how she will fund a package of measures, such as scrapping the planned national insurance and corporation tax rises and cutting value added tax, which the Institute for Fiscal Studies has estimated will cost £30bn.

Frédérique Carrier, head of investment strategy at RBC Wealth Management, noted that Truss “will likely be less keen to balance the country’s books than former chancellor Sunak would have been, and interest rates are likely to increase further during her premiership”.

“Truss seems less fiscally conservative than former chancellor Sunak. She now seems to be in favour of supporting the economy other than through tax cuts. This ultimately means higher borrowing, and in turn it means the BoE could be forced to increase rates further than otherwise would have been the case,” he explained.

RBC Wealth Management expects two 50 basis point rate increases following the BoE’s meetings in September and November, with the latter possibly rising to 75bp depending on the current inflation figure and the government’s newly announced fiscal plans.

Higher rates can have positive effects on pension annuities, and there is — potentially — further good news for pensioners, in that Truss appears to have ruled out repeating the suspension of the state pension triple lock that took place when leadership rival Sunak was chancellor. 

The suspension occurred when average earnings rose by 8 per cent in 2021, largely due to the rebound from lockdown. The average earnings element of the triple lock was therefore suspended, meaning that state pensions increased by the then inflation rate of 3.1 per cent, a move that saved HM Treasury an estimated £5bn a year. 

AJ Bell’s head of retirement policy, Tom Selby, noted, however, that Truss “has pledged not to go down this path again as prime minister”. 

“Assuming she sticks to her guns and the triple lock remains in place, retirees could receive a huge boost to their incomes next year. September’s inflation figure will be the one to look out for, with the BoE predicting a peak at 13 per cent at some point later this year,” he said.

“If it were to hit 13 per cent for September, the basic state pension would rise by £18.45 to £160.30 a week (£8,335.60 a year) in April 2023, while the new state pension would increase by £24.10 to £209.25 a week (£10,881 a year).

“This could cost the Treasury well in excess of £10bn — a huge price to pay for the keys to Number 10. What’s more, this isn’t a one-off cost, it would fall on the exchequer every year.”

Pressure mounts for NHS pensions solution

Pressure is also on Truss to tackle the staffing and waiting list crises in the NHS. Staff are retiring at record rates, while figures leaked to the Spectator earlier this year suggest that waiting lists could shortly rise to between 6mn and 10mn people.

The government has announced an extension to the easement of rulesaround staff who “retire and return”. Originally brought in to encourage retired staff back into the NHS to help tackle the Covid-19 pandemic, the easement entailed the suspension of rules that would ordinarily have mandated pension abatements and suspensions for returning workers who exceed, among other criteria, certain salary thresholds.

The decision to extend the easement was criticised by the British Medical Association, which has long argued for significant changes in pensions taxation rules that it — along with the Policy Exchange think tank — said are forcing doctors and consultants into retirement because of the punitive tax burden they will shoulder if they exceed their lifetime and annual allowance caps.

Alec Collie, head of medical at Wesleyan Group, the specialist financial services mutual for doctors, said: “Truss faces an NHS that is grappling with severe workload and workforce challenges. She’s said that slashing backlogs will be one of her top priorities, and all eyes will be on what concrete steps she now takes to deliver real change.

“One rumoured action she has on her ‘to-do’ list is to fix the pensions tax rules that we know are stopping doctors from taking on extra work, and even forcing some to leave the NHS altogether. Changes to the lifetime allowance have been mentioned, but addressing issues arising from the annual allowance will be essential too.”

Soaring inflation makes this issue especially pressing as more clinicians could potentially “receive an annual allowance tax charge for last year’s pension growth — something many may simply not have realised. More could receive on for this year too if, as expected, inflation continues its dizzying climb”, he continued.

“We simply can’t afford to lose any more skilled, dedicated professionals from our hospitals and GP surgeries. Anything that penalises them for continuing to go above and beyond for their patients is simply unacceptable.”

Merging regulators?

Away from issues of inflation and taxation, AJ Bell’s head of policy development Rachel Vahey pointed out that one campaign rumour was that Truss was considering merging financial regulators.

The Financial Times reported that Truss was looking at merging the Financial Conduct Authority, the Prudential Regulation Authority, and the Payment Systems Regulator, which overseas money transfer networks, contactless payment systems and cash machines.

This would, in effect, see the re-merger of two regulators only split off from each other in 2013 with the dissolution of the Financial Services Authority.

“Merging regulators is no small task. Each has specific duties and tasks, and in the meshing of the regulators it would be important to make sure that the key protections of each are still carried out,” Vahey explained.

She said that the pensions regulatory environment might benefit from the “simplification”, and acknowledged the potential case “for merging the FCA with the Pensions Regulator to create just one regulator responsible for all defined contribution pensions”.

“This would help bring consistency for all pension consumers, meaning they get the same level of protection regardless of the background surrounding how the pension is established. It would also be easier for providers implementing new rules, who have found in the past that two sets of rules from two regulators are contradictory in practice,” she said.

Vahey added that any review could include “a closer look at the role the Financial Ombudsman plays, and the extent to which it should support and uphold the FCA regulations”.

“As Truss gets her feet under the desk at Number 10, we will see whether the threat of a mega financial regulator was mere chest beating designed to send shock waves, or whether she truly believes this is the right way forward to protect consumers,” she said.