This speedbrief looks at the main pensions-related aspects of the 20 March 2013 budget announcement.
New Regulator objective but no new law on smoothing
In January 2013, the Department for Work and Pensions (DWP) issued a call for evidence seeking views on whether the Pensions Regulator (the Regulator) should be given a new statutory objective to consider the long-term affordability of deficit recovery plans to sponsoring employers (see our speedbrief of 29 January 2013).
The CBI and others campaigned for a broader Regulator objective which would take into account the interests of sponsoring employers, particularly given that recent economic conditions have put companies sponsoring defined benefit (DB) schemes under significant financial pressure. Eversheds contributed, in its role as a member of the CBI Pensions Panel, to this debate.
Somewhat unexpectedly, the Government announced in the budget that it will give the Regulator a new objective “to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation”. The precise wording of this new objective will be set out in legislation to be published by the DWP in spring 2013. Implementation of the new objective will be subject to review after six months.
The Regulator will revise its Code of Practice on funding DB schemes to reflect the new objective “as soon as possible in 2013”. It also said that it will publish this year’s annual funding statement shortly; this will set out its guidance to trustees in the context of current economic circumstances.
The DWP’s call for evidence in January 2013 also sought views on potential legislative changes to allow explicitly for the smoothing of asset and liability values in pension scheme valuations. It seems that this did not reveal a strong case for changing legislation, so this will not be progressed.
Single-tier state pension and end of contracting-out: coming sooner than expected
The Government has been planning for some time to simplify the complex state pension system by abolishing the state second pension and introducing a single-tier state pension, estimated at £144 a week. This change will mean the end of DB contracting-out: without the state second pension, there is nothing left to contract out of (defined contribution contracting-out was abolished last year).
The Government previously indicated that the single-tier state pension would be introduced no sooner than April 2017. The Chancellor has now announced (in his budget speech and in an interview a few days beforehand) that this change will instead happen from April 2016.
This means that contracted-out DB scheme members and their employers will have to pay higher National Insurance Contributions (NICs) from April 2016. The Government has committed to legislating for a statutory override designed to allow private (but not public) sector employers to cover the costs of additional NICs payments through changes (without trustee consent) to scheme contribution rates or benefits. It is not yet clear precisely how this will operate in practice.
The Government says the additional revenue arising from higher employer NICs due to the end of contracting-out will help to cover the costs of social care reform, in particular the cap of £72,000 on reasonable care costs due to be introduced from April 2016.
Other pensions-related changes
Lifetime allowance protections - The Chancellor announced in his 2012 autumn statement (see our speedbrief of 5 December 2012), that the lifetime allowance will reduce from £1.5 million to £1.25 million from 2014/15. The Government plans to offer a “fixed protection” and an “individual protection” regime to enable affected individuals to protect themselves from this change. The budget announcement confirms that the Government plans to consult on the detail of these regimes in spring 2013, with legislation to be included in the Finance Bill 2014. Once available, this detail should help employers and individuals to put in place plans to address the reduction in the lifetime allowance.
Increase in personal tax allowance - The earnings trigger at which automatic enrolment duties start to apply is currently the same as the income tax personal allowance. The personal allowance will increase by £560 to £10,000 in 2014/15. This does not necessarily mean an increase in the earnings trigger (these are not automatically linked) but if the link does continue, this will mean more low earners falling outside the scope of the automatic enrolment regime.
Quantitative easing (QE) to continue - The Government confirmed that the asset purchase facility (the Bank of England’s QE programme) will remain in place for the financial year 2013/14. This is likely to continue to depress gilt yields, inflating DB liabilities and resulting in continued poor rates for those purchasing annuities.
Abolition of stamp duty on Alternative Investment Market (AIM) shares - From April 2014, the Government will abolish stamp duty on shares of companies listed on growth markets including AIM. This is designed to assist smaller quoted UK firms and may also benefit their investors.
It comes as a relief that, following the significant reductions to pensions tax reliefs in previous budgets, the Chancellor announced no further pensions tax changes yesterday.
While the decision to bring forward the introduction of the single-tier state pension is good news for many, it does mean that employers with DB schemes need to start preparing sooner than anticipated for the abolition of contracting-out. To alleviate the effects of the resulting increase in NICs, employers should consider an adjustment to scheme benefits or member contribution rates via the proposed statutory override.
Sponsors of DB schemes will be keen to find out precisely how the Regulator’s new objective (to support scheme funding arrangements that are compatible with their sustainable growth) is worded in legislation, and how its Code of Practice on DB scheme funding is amended as a result. It will be interesting to see how the Regulator will strike a balance between the new objective and its current objectives, which focus on protecting member benefits and the Pension Protection Fund.