Broadstone - Budget announcements from a pensions perspective

What’s new?

The big news is the confirmation that the proposals for smoothing have been shelved, due to an underwhelming response from the respondents to the Government’s call for evidence. However, the simultaneous proposal to review the Pensions Regulator’s objective to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation, has survived.

The DWP will be unveiling the precise wording of this new objective in the Spring and the Regulator’s DB Funding Code of Practice will be reviewed accordingly.

We believe that this will lead to lower overall deficit funding rates. This marks a clear shift in the balance of power. The majority of DB scheme sponsors will want to argue that sustainable growth requires greater investment in their business, and thus lower contributions to fund pension deficits. Larger deficits mean less security for members, and a heightened chance that schemes end up cutting benefits and being dumped in the PPF.

The Chancellor confirmed the much trailed announcement on State Pension Reform which will introduce a flat-rate pension of £144pw from 2016. The winners and losers will be broadly the same, but new winners are those that reach their State Pension Age between 2016 and 2017 who are now inside the tent. This signals the end to contracting-out and this will have an impact on those open contracted-put DB schemes. The Chancellor has confirmed that those schemes will be able to change their rules to reflect the higher National Insurance costs they will incur from April 2016. We were already anticipating legislation from the DWP and so expect it sooner.

Round-up of other announcements

The Equitable Life compensation payments received a charitable boost from the Government for those who purchased with-profits annuities. An ex-gratia payment of £5,000 will be made with a further £5,000 for those on pensions credit.

George Osborne’s one-man-plan to create a house price boom is appended to with a consultation on amending rules for “investment regulated pensions” (SIPPS to you and me). The consultation will look into allowing residential properties that have been converted from unused space in commercial properties in high streets and town centres to be permissible investments. One piece of good news is that the “pensions for property” plan as proposed by Nick Clegg seems to have been quietly left by a civil servant on a train somewhere.

During the Chancellor’s discussion about the Monetary Policy Committee there were worrying hints for more QE. We shall see but this would continue to be bad news for pensions if the policy was extended.

The personal allowance will be raised to £10,000 from April 2014 which will be good news. However, the personal allowance has been the trigger for auto-enrolment and so this rise (if brought through to apply to auto-enrolment) will reduce further the number of individuals who will be automatically enrolled in a pension scheme.

What was already coming (from the Autumn Statement) and remains unchanged?

Lifetime Allowance – reduced to £1.25m from 6 April 2014 (from £1.5m) Annual Allowance – reduced to £40,000 from 6 April 2014 (from £50,000).

A new fixed protection regime will be introduced together with an individual protection. The individual protection will apply to those with pension savings worth more than £1.25m. A consultation will take place over the Spring with legislation to be included in Finance Bill (Act) 2014.

Tax and NI advantages of family pensions will be removed by Finance Bill (Act) 2013.

QROPS will be required to re-certify their status every 5 years. Also former QROPS will have to continue to report payments out in respect of transfers received while they were a QROPS.

Pension drawdown rates, where capped drawdown is used, will rise to 120% of the GAD annuity from 26 March 2013. GAD have also been tasked with reviewing the underlying table which informs the GAD annuity rate.

Comment

A Budget relatively light on further pensions tinkering is blessed relief. Tax-free cash remains tax-free and the already reduced annual and lifetime allowances remain unreduced are the main items to receive a reprieve.

It will be interesting to see how the Pensions Regulator’s new objective is transposed into guidance but this is sure to take employer covenant reviews to another level and the Regulator will now want more evidence from the Trustees where they have decided to acquiesce on contributions into the scheme in return for the greater chance of a solvent and even profitable sponsoring employer.

Also those employers involved with DB schemes both open to accrual and contracted-out should take urgent action to consider the impact the end to contracting-out will have and assess the options open to them to review pension benefits.