On Wednesday the Chancellor, George Osborne, delivered his fourth budget. With the UK economy recovering from the biggest financial crisis in generations and a decade of reduced growth, the Chancellor set out progress made since his first budget in June 2010. He stated that the Government has reduced the deficit not by a quarter but by a third and helped businesses create one and a quarter million new jobs.
Keen to make sure the Monetary Policy Committee (MPC) plays a full role in supporting the economy, he set out a revised remit for the MPC. This reaffirms the inflation target as two per cent of CPI. Demonstrating that the Government has listened to industry feedback, the Treasury has abandoned plans to smooth pension scheme assets and liabilities to reduce deficits. We welcome this step.
Following his comments at the weekend, the Chancellor confirmed that the new single tier state pension will be brought forward to 2016. We share the Society of Pension Consultants' view that this is a bold move and note that there is a considerable amount of work to be done to achieve this by 2016.
Bringing forward the single tier state pension will also accelerate the end of contracting-out. From 2016 members of contracted-out DB schemes will pay higher National Insurance Contributions. The Chancellor stated that public sector employers will have to absorb this cost, whereas private sector employers can adjust their pension benefits to accommodate the extra cost. While we welcome the end of the complex jigsaw which is contracting-out, we fear this is yet another fatal blow for DB schemes.
In line with last year's Autumn Statement, additional rate income tax payers will see their tax relief on pension contributions fall from 50 per cent to 45 per cent on 6 April 2013. Legislation is to be introduced in the Finance Bill 2013 to reduce the annual allowance from £50,000 to £40,000 for 2014-15. The Lifetime Allowance will also reduce from £1.5 million to £1.25 million for 2014-15. The DWP will consult on protection for individuals affected by this reduction later this year with measures included in the Finance Bill 2014.
The personal tax allowance will be £10,000 from April 2014. The earnings threshold for auto-enrolment is aligned to this. Therefore employers with fewer than 160 employees will now only have to auto-enrol employees earning over £10,000. Employers with between 160 and 349 employees in their PAYE scheme may want to consider delaying auto-enrolment by three months to take advantage of the increase in the earnings threshold.
The Chancellor also announced a new payment to pre-1992 Equitable Life policyholders. They will each receive an ex-gratia payment of £5,000. A further £5,000 will be available to those on the lowest incomes on pension credit.
Finally, the Pensions Regulator is to be given a new objective to consider the growth prospects of employers when considering the funding of their pension schemes. The DWP will set out the precise wording of this obligation later this year. We hope this will enable the Pensions Regulator to take a more flexible approach in agreeing the levels of prudence required to fund DB pension schemes.