WIREDGOV

“We weren’t expecting much pension news in the Budget but there was a surprising amount.  But most of the announcements were just the start of a long process of change rather than immediate actions.

Private sector pension

For private sector schemes the big news is that the government confirmed the intention to end Defined Benefit contracting-out – as we trailed following the Office of Tax Simplification review.  This is a consequence of migrating to a new “single tier pension” and scrapping the State Second Pension, and conveniently it would also generate significant revenue for Treasury in the short-term.  For the dwindling number of private sector schemes that haven’t been changed already this may lead to further changes or closures of DB plans – otherwise employers will be forced to absorb another 3.4% of pay in cost increases and members will also see a hit in their pocket.

Tucked away in the details was also some anti-avoidance legislation targeting asset-backed structures that companies are using to plug pension deficits.  At first glance the wording suggests that government will prevent these structures in future, but our discussions with HMRC suggest something different.  It appears that there are concerns with structures which give more tax relief than the value passed to the pension scheme – e.g. structures with contingent payments to the Trustees or designed to generate a “double dip” tax deduction.  We believe that the government is not targeting circumstances where absolute value is passed irrevocably to the pension scheme.  But no doubt some advisers and companies will be forced to rethink their plans.

State pensions

The well-trailed “universal” or “single tier” State pension was confirmed with a target level of £140 per week.  The chancellor claimed that this would be cost-neutral, presumably funded by scrapping the additional State Second Pensions (which is related to earnings) and savings on means-tested benefits.  This means a higher minimum basic pension but a material reduction for some future pensioners.  These changes are likely to take a long time with an extended lead in period so that they only significantly affect retirements years into the future.

The intention is also that State Pension Age increases more automatically in future as life expectancy rises.  This will need more development, but if for example the State Pension Age followed increasing life expectancy year-for-year then this could give rise to significant increases.  For example the government’s statistics show that population life expectancy has risen by 6 years in the last 30 years, so had this mechanism been in place since 1980 we could be looking at a State Pension Age of 71 already!

Public sector pensions

As expected the government accepted in full the Hutton recommendations and confirmed the decision to raise member contributions by 3% of pay on average – although the chancellor noted that there was a case for even greater contribution increases.

The government also confirmed the appropriate discount rate for public sector pension liabilities at “CPI + GDP growth” – a figure of perhaps 5% long-term, and much lower than the formula of RPI + 3.5% currently used.  This will increase the value of public sector pension costs and may lead to bigger reductions in public sector pensions than previously thought.”

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Margot Cowhig

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Email: margot.cowhig@kpmg.co.uk

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