Mercer has welcomed the consultation into 'Employer Asset-backed Pension Contributions' announced by HM Treasury as a step to bringing this valuable funding tool into the mainstream. The company shares the Treasury’s view that there is value for both trustees and employers in having access to a wide range of solutions for meeting Defined Benefit (DB) pension scheme deficits. Mercer does, however, agree that it might be possible for Asset-Backed Contributions (ABCs) to give rise to tax anomalies, so welcomes the consultation.
The consultation is on how tax relief is calculated for ABCs. It indicates that there is no intention to put an end to them but aims to ensure that the tax relief granted to companies is commensurate with the value of the ABC to the trustees. The consultation wants to ensure that pension taxation remains 'fair and sustainable' over the long term and that tax relief accurately reflects the fair value of contributions made to pension schemes.
According to Matthew Demwell, Partner at Mercer, “The consultation is likely to help ABCs shed their 'dark' image and allow them to become part of the mainstream toolkit available to trustees and employers considering how to finance their schemes. The ABC market is developing and, as with any new financial structure, it’s appropriate for HM Treasury to review how they work.”
According to Mercer, asset-backed contributions can be a good funding solution for trustees and employers alike. The pension scheme has its deficit addressed up front and the employer’s cash flow requirement is less onerous than under a typical cash-only recovery plan. This is particularly important in the current economic climate. However, the consultancy agrees that, in terms of tax liability, there needs to be a level playing field between different structures for making contributions.
"In our experience,” continued Mr Demwell, “trustees take independent advice and price the relevant assets at market or fair value, in which case there should be little opportunity for tax arbitrage. However, the consultation still makes sense since it may be possible to devise arrangementsthat game the current system, and their status needs to be reviewed to avoid the whole market being brought into disrepute. We would urge the Treasury to ensure that that the outcome does not restrict this important and legitimate method of funding, however. If it does, it could damage both employers’ cash flow and pension schemes’ funding levels."
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