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IFoA response to Budget 2020

The UK Chancellor of the Exchequer Rishi Sunak delivered his Budget to Parliament today (Wednesday 11 March). The Policy and Public Affairs team at the Institute and Faculty of Actuaries has identified areas of work relevant to the budget announcements and developed this response.

On infrastructure:

  • Infrastructure investments provide assets that match the liabilities of pension funds and insurance companies. Over the past few years, there has been a dearth of infrastructure projects in the UK due to political and economic uncertainty. Today’s announcement by the Chancellor to invest £600bn in housing, transport and broadband projects is therefore welcomed and will drive growth and job creation around the country. Going forward, the Government should develop a sustainable pipeline of infrastructure projects that fit into a coherent, long term strategy.
  • We also welcome the Government’s decision to review the Green Book which sets out how decisions on major investment programmes are appraised in order to make sure that government investment spreads opportunity across the UK. This is all the more critical to understand the implications of infrastructure investment from both a resilience perspective, but also how the needs of future generations are discounted.

On flooding:

  • The investment of £5.2 billion in flood defences in light of recent bad weather events will be welcomed by those communities hit hardest over the past few weeks. However, a longer-term flood defence strategy is overdue. Defences need to be strengthened and more needs to be done to ensure resilience is improved whilst the Flood Re scheme is in place. Flood Re provides valuable breathing space, but all parties should remember that it is a temporary measure rather than a long term solution and that, as long as high flood risk persists, an affordable market based on risk-reflective pricing is unlikely to be achieved.

On pensions tax relief:

  • Pensions tax relief acts as an important incentive for people to save for their retirement. This is more important than ever in an era where many individuals are taking full responsibility for funding their later life. 
  • Tinkering to address a work planning issue in the NHS represents a short-term fix. We welcome the Government’s intention to consult on more fundamental reforms to the pension tax relief system.

On Access to Cash:

  • The IFoA welcomes the government’s recognition and decision to act upon the issues related to access to cash, and its associated costs. However, legislation alone will not stop the evolution towards a less-cash society.
  • Thus, we call on the government to initiate a broader transition programme that will aim at removing barriers to the adoption of digital payments by disadvantaged groups. Only an integrated plan will enable the country to navigate through the risks and issues of a less-cash society.

On RPI to CPI consultation:

  • RPI is widely considered an imperfect measure of general inflation, greatly overestimating and at other times underestimating changes in prices and how these changes are experienced. RPI can also be more volatile, and it does not match with other countries’ inflation measures. Whilst the CPI can provide a more realistic reflection of inflation, it also possesses some inherent weaknesses, including the fact that the consumer goods it considers do not provide an index that measures all production or consumption in the economy.
  • In practical terms, a change to CPI from RPI would benefit those who make payments based on the value of the index; however, those who receive benefits linked to the value of the index will be more likely to receive lower future benefits. As a result, changes to the measure of inflation used will create winners and losers in all cases, sometimes very unevenly. A change in the inflation rate has most impact on long-term contracts which contain an explicit linkage to RPI. We look intend to highlight the impact of any changes in our submission to the forthcoming consultation.

We acknowledge the Government’s commitment to publishing more details on climate change ahead of COP26 and on social care reform. We urge the Government to act swiftly on both of these pressing issues where evidence of reaching a crisis point is already prevalent.