Left hand, meet right hand
Politically, the move was a masterstroke. Labour struggled to come up with a response – oppose it and they faced being labelled nanny-staters who would not trust people with their own money. Support it, of course, and they would find themselves in the politically difficult position of applauding their rivals for something they had not even considered.
Economically, though, the decision may fall far short of the masterstroke that many in the blue camp have been talking it up as.
Less than a fortnight after the announcement, ratings agency Moody’s had made up its mind on the impact of the decision on the UK’s pension companies. The outlook for some of the biggest companies – including Prudential UK, Legal & General and Aviva Life & Pensions UK – was cut amid concerns over the likely short-term effect of the changes to pensions policy.
“While the changes introduced in the budget may ultimately encourage future savings into pension products, the short-term impact will likely be a significant reduction in sales volumes and margins in the UK individual annuity market, a key driver of future profitability for many insurers,” said Moody’s in its statement.
The agency suggested that the changes could drive individual annuity new business sales down by between 50%-75% of their current level over the near-to-medium term.
All this matters significantly to the UK infrastructure market, because these are just the sort of companies that the government has been trying to entice to invest more money in the sector. If new business is about to fall off a cliff, and the firms’ ratings are being cut, suddenly there may not be a whole lot of money available to invest after all.
Given that in December, Chief Secretary to the Treasury Danny Alexander was welcoming promises of new investment from the insurance industry as a signal of the government’s efforts to open up the infrastructure market to institutional investors, Osborne’s Budget giveaway seems even more surprising.
Cynics will say that the left hand simply does not know what the right hand is trying to achieve within Treasury. If that is the case, it must surely be about time the two at least met to let each other know what they are working on.