By Tyron Potts, Associate at Barnett Waddingham
The Budget and Pensions
When the Chancellor of the Exchequer George Osborne stood up in the House of Commons on 21 March and said “I don’t intend to make any significant changes to pensions relief in this Budget”, the sigh of relief from the pensions industry was almost audible.
Although the 2012 Budget did nothing to improve the long-term outlook for occupational pension schemes, there was nevertheless very little to worsen that outlook either, as evidenced by the lack of “final-nail-in-the-coffin” quotes in the following days’ pensions press.
In the lead up toBudget Day, there had been a great deal of speculation that the Treasury was about to tinker with tax relief for pension arrangements, including rumours aboutfurther reductions in the Annual Allowance, caps on tax free Pension Commencement Lump Sums and restricting of tax-relief to the basic rate of income tax.None of these rumours turned out to be true however.
There was a fair bit of tidying up on overseas pension schemes, employer asset-backed contributions and fixed protection following the reduction in the Lifetime Allowance from 6 April 2012. However, the big pensionsannouncements related to forthcoming changes to the state benefits system, starting with April’s consultation on integrating National Insurance and Income Tax collection.
The Chancellor also reaffirmed the Government’s intention to press ahead with combining the State Second Pension (S2P) and Basic State Pension into a single-tier state pension worth around £140 per week. Full details are expected later this Spring, but we anticipate that one particular significant consequence of the reforms will be to end contracting-out for salary-related pension schemes.
The Treasury also announced plans to automatically link State Pension Age (SPA) with future improvement in life expectancy - full details of which will come later this year.
Impact
Whilst there is still plenty to do as we near the end of another tax year – including ensuring that fixed protection registrations are completed and that schemes have updated the PPF ready for the next round of levies - any thoughts of having to re-plan around Lifetime and Annual Allowances changes have been put to the back of our minds, for now at least.
However, further planning may still be required as a result of the 2012 Budget. In particular, if the reform of state pension benefits goes ahead, there will be plenty of pondering over how to manage the transition to being contracted-in for schemes who are currently contracted-out of the S2P on a salary-related basis.
For example, will sponsoring companies be able to stomach bigger National Insurance bills, or will there be a flurry of scheme re-designs now that members will be accruing higher state benefits on top of their scheme pension?
At the same time, the DWP is insisting that contracted-out schemes will have to equalise Guaranteed Minimum Pensions (GMPs). The ability to be able to convert GMPsinto main scheme benefitswas added to the statute in 2010 with little in the way of fanfare, but this one-off value-based exercise could in fact become the main way in which the issue of GMP equalisation is resolved.
So, could the ending of contracting-out be another peg for the nail-in-coffin brigade to hang their hats on? Faced with the choice between increased funding costs (in terms of reduced National Insurance rebates) or administering a one-off change to benefits to counteract the effects, many companies might consider this is a step too far and another reason to consider switching from providing defined benefits pensions to defined contributions.
This is more pertinent as we enter the era of auto-enrolment when firms are looking to ensure that their entire workforce has access to suitable retirement provision and many are reported to be considering “levelling down” from defined benefit to defined contribution provision.
Auto-enrolment itself was not immune from the effects of the Budget. An indirect effect of increasing the personal Income Tax allowance to £9,205 in 2013 will, following a recent consultation, be to increase the earnings trigger at which auto-enrolment kicks in – thereby potentially reducing the number of people being auto-enroled at a lower cost for UK businesses.
State Pension Age
The plan to raise the State Pension Age in line with increases in life expectancy is an obvious solution to the rising costs of providing state-sponsored pension benefits, particularly where this rising cost is attributable to increasing longevity.
The Treasury’s proposals, due later in 2012, could prove to be a valuableblue print for occupational defined benefit schemes to similarly link their retirement ages to life expectancy so helping to manage their longevity risk.
There have been several reported cases of one-off increases to pension scheme retirement ages recently, includingthe high-profile Tesco Pension Scheme. The Treasury’s approach could yet turn out to help occupational schemes wanting to follow suit, although the Government may have to consider further legislative tweaks (for example to the employer consultation regulations) to remove administrative hurdles.
Before we know it, it will be Autumn and therefore time for the Chancellor’s pre-Budget report, and so speculation of restricted tax relief and decreased allowances will no doubt surface once again. We’ll have to wait and see whether this time something positive will reinvigorate occupational pension provision, or perhaps one of the proposals will turn out to be thatfabled final nail.
|
