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General election and Conservative-Liberal Democrat coalition

Following the general election on 6 May 2010 and the subsequent formation of the Conservative-Liberal Democrat coalition, it was announced that:

• The new Secretary of State for Work and Pensions is Iain Duncan Smith (Conservative); and
• The new Minister of State for Pensions is Steve Webb (Liberal Democrat).

The final coalition agreement, which was published on 20 May 2010, sets out the main agreed policies of the coalition. These are:

• To restore the link to earnings for the basic state pension from April 2011 with a “triple guarantee” that pensions are increased each year by the highest of the increases in earnings, prices or 2.5%;
• The rules requiring individuals with defined contribution pension savings to buy an annuity by age 75 will be removed.  The coalition will also explore the potential to give people greater flexibility in accessing part of their personal pension fund early;
• To hold a review to set the date at which State Pension Age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women;
• To phase out the rule allowing employers to force an employee to retire at age 65, known as the “Default Retirement Age”;
• To work with business and the industry to support auto-enrolment into pensions saving;
• To simplify the rules and regulations relating to pensions to encourage occupational pension saving;
• To establish an independent commission to review the long term affordability of public sector pensions, while protecting accrued rights;
• To implement the Parliamentary and Health Ombudsman’s recommendation to make “fair and transparent payments” to Equitable Life policy holders, for their relative loss resulting from regulatory failure; and
• To establish a commission on long-term care, to report within a year.

It is also interesting to note what has NOT been included in the coalition agreement.  There is no mention of any changes to higher rate tax relief on pensions.  The restriction on higher rate tax relief introduced by the previous Labour administration (see below for more details) is on the statue book so primary legislation would need to be amended if it were decided to stop or change it.  In light of the Liberal Democrat manifesto proposal to completely remove higher rate tax relief and the huge budget deficit, higher earners might be concerned that the government decides that higher rate tax relief on pensions contributions cannot be afforded in future.  

There is also no mention of NEST, which is due to commence in 2012 (see below).  The Government has recently announced that it planned to save £1.7 billion from delaying and stopping contracts and projects.  It is believed that the contract to administer NEST is included in this plan; however, details are not presently available.

Our colleagues in Punter Southall Financial Management will be happy to provide advice to individuals potentially affected by the proposals set out above.

Press release: Punter Southall: High earners: Five key tax changes (May 2010) 

Restrictions on Higher Rate Tax Relief

The Budget Report of 24 March 2010 saw the publication of a summary of the more than one hundred responses to the Government consultation paper on the implementation of the proposed restrictions to higher rate tax relief with effect from 6 April 2011. In addition to summarising the (often highly critical) responses, this document confirmed the Government’s intention to proceed with its policy with very few changes. Some of the necessary legislation has now been published in the Finance Act 2010.

Higher rate tax relief on pension contributions will be tapered down for those with incomes of between £150,000 and £180,000, so that those on £180,000 or more will only benefit from basic rate tax relief. Employers’ tax relief through corporation tax will not be affected; however, individuals will be taxed on any contributions paid by the employer. Individuals with income of £130,000 and over may be caught by the changes if they have employer contributions that take their total income over £150,000.

When the proposals were first announced back in the April 2009 Budget, so-called “anti-forestalling” measures were introduced to prevent affected individuals increasing their pension contributions before 2011 to avoid the forthcoming restriction of higher rate tax relief.    Additional anti-forestalling provisions apply from 9 December 2009 (when the consultation on the detail of the April 2011 changes was published) covering individuals with incomes of £130,000 and above not covered by the earlier anti-forestalling provisions.
 

Please contact us if you would like further information on how these changes will affect your pension scheme. Our colleagues in Punter Southall Financial Management will be happy to provide advice to affected individuals.

Pensions bulletin: Quarterly Update (April 2010)

Press release: Punter Southall warns High Earners that current tax changes could be 'small change' (updated) (April 2010)

Briefing note: Anti-forestalling measures for high earners (updated) (April 2010)

Briefing note: Restricting tax relief for high earners (updated) (April 2010)

Accounting for Pension Costs

Companies must disclose information about their pension schemes annually in their accounts.  The International Accounting Standards Board (IASB) is considering ways to improve the information that is provided in listed companies’ accounts.  The first strand of changes has just been released for consultation as an Exposure Draft.  As expected the main change proposed is that, in future, all actuarial gains and losses must be recognised immediately.   Currently these may be “spread” using a 10% corridor.  Punter Southall’s specialists are reviewing the exposure draft in detail and will respond to the consultation, which runs until 6 September 2010, in due course. The proposed changes are expected to be finalised in mid-2011.  Once these changes have been implemented the IASB intends to carry out a comprehensive review of accounting for employee benefits but does not plan on commencing any work on this comprehensive review before mid-2011. We would be happy to discuss any of the proposed changes and the potential impacts for your firm.

Press release: Punter Southall says IASB's proposed changes to IAS 19 may cause a multi-billion balance sheet hole (April 2010)

Briefing note: IASB Proposals (January 2010)

Briefing note: 2009 year-end accounting (January 2010)

The Pension Protection Levy

The independent Pension Protection Fund (“PPF”) Steering Group, set up by the PPF to help develop ideas for the long-term future of the levy, has recently (March 2010) published a paper setting out proposals for the future of the levy.  The Group’s starting point is that changes in a scheme’s levy should derive from changes to its own risk and not from changes in the risks of other schemes and so it should be possible to estimate a scheme’s levy for a number of years ahead.

The Group proposes that risks should be assessed on a ‘through-the-cycle’ basis rather than at a single point in time. This could include: 

• smoothing underfunding over a number of years; and
• measuring average insolvency risk over the economic cycle and using fewer categories (e.g. seven as opposed to the current 100).

The Group also suggests that the levy should reinforce improvements in governance by having a stronger focus on risks that schemes can genuinely control such as funding and investment strategy.  The Board of the PPF will consider the Steering Group’s conclusions and set out their view for formal consultation.

Meanwhile, if we look ahead to the 2011/12 levy, it will be calculated by reference to the level of underfunding and insolvency risk as at 31 March 2010.  D&B, who provide the PPF with insolvency risk probabilities, have made significant changes to their methodology. This could have substantial impacts for schemes’ levy calculations for 2011/12 and subsequent years.

Please contact us if you would like advice on ways in which you can reduce your levy.

Briefing Note: Pension scheme levies 2010/11 (February 2010)

The Pensions Regulator has now published a revised code of practice and scope guidance on Trustee Knowledge and Understanding (TKU). The main thrust of the code of practice and guidance is unchanged, but the scope has now been extended to cover a number of additional areas, including the importance of good administration, the introduction of employer duties in 2012 and buy-out and wind-up issues.

This publication makes now a good time for trustee boards to review their TKU policy and to consider what training courses they wish to arrange in 2010. Punter Southall offers a full spectrum of training courses with programmes aimed at a variety of participants with all levels of previous training and experience. Punter Southall works with the Trustee & Pension Management Association (TPMA) to provide an introductory course for pension trustees, which covers all the areas specified by TPR. Punter Southall also provides a fuller range of training to trustees, pensions managers, HR/Finance personnel and corporate sponsors.
 
Punter Southall Trustee Training

Briefing note: Review of Trustee Knowledge and Understanding (December 2008) 

Employer Duties: Auto-enrolment and NEST

The proposed launch date for the new employer duties regime is expected to be October 2012. This might seem a long way off, but employer duties are likely to have significant implications for employers who already offer a pension scheme.

From 2012, all employees aged between 22 and State Pension Age with annual earnings in excess of £5,035 must automatically be enrolled into either the National Employment Savings Trust (“NEST”, formerly called personal accounts) or a scheme that provides at least broadly equivalent benefits.

Following two significant consultations last year on employer duties, the details of how the employer duties regime will operate have now been finalised.  Employers should be taking account of the introduction of auto-enrolment and the NEST when making decisions about pensions today. Punter Southall can help you understand how 2012 may affect you.

Briefing note: Workplace pensions reform (January 2010)

Briefing note: "Completing the Picture" - the DWP’s second auto-enrolment consultation (October 2009)

Buy-out

A couple of years ago, a wave of new entrants to the buy-out market led to many schemes considering buy-out from either a trustee or a company viewpoint. However recent research carried out by Punter Southall Transaction Services indicates that in around 84% of scenarios a pension scheme would be able to run off the liabilities at a cost below the buy-out price.