Budget 2013 heralds a new objective for TPR

Introduction

In a Budget that generally contains little that is new for workplace pension schemes, the Chancellor has announced the introduction of a new objective for TPR.

In this Alert:

Key points
A new statutory objective for TPR
State Pension changes
Pensions tax relief
In other pensions news
Finance Bill 2013

Key points

Following a call for evidence from the DWP, a new statutory objective will be introduced for TPR to take account of the long-term affordability of deficit recovery plans to sponsoring employers.1
However, the Government has confirmed that it will not introduce legislation to explicitly allow the smoothing of assets and liabilities in pension scheme valuations, as responses to the call for evidence “did not reveal a strong case” for change.
The Chancellor has announced that, from April 2014, the personal allowance will increase to £10,000. As one of the triggers for an employer to automatically enrol a worker into pensions saving is currently linked to this allowance, the numbers being automatically enrolled look set to drop from previously given estimates.
The introduction of a flat rate state pension of £144 per week (at today’s prices) will be brought forward to 2016, leading to a faster demise of DB contracting-out.

A new statutory objective for TPR

TPR has five statutory objectives, including the need to protect members’ benefits and to reduce the risk of situations arising which may lead to compensation being payable from the PPF.

The Budget confirms the Government’s intention to add a new objective for TPR to “support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation”.

The new statutory objective was put forward on the basis that TPR is currently required to focus explicitly on protecting members and the PPF, but not to consider the long-term affordability of deficit repair contributions for the employers who sponsor DB pension schemes. The Government is now pressing ahead, despite the view 2 that this factor is already taken into account, albeit “implicitly”, in TPR’s Code of Practice on scheme funding (which states that trustees should consider the affordability for the employer) and through its operational practice.3

Legislation to implement the new objective is expected to be published by the DWP “later in spring 2013” and will set out the precise wording of the new objective. (Somewhat unusually, the Government intends to review implementation of the new objective after six months.) TPR will also revise its scheme funding Code as soon as possible, to reflect the forthcoming new objective.

State Pension changes

The current system comprises the Basic State Pension, the additional state pension (currently S2P but formerly SERPS) which is linked to earnings, and the pension credit (a means tested benefit).

In this year’s Pensions White Paper4 the Government announced that, with effect from 2017 at the earliest, it intended to replace the current system with a flat-rate benefit. This announcement was closely followed by provisions to implement the change in the draft Pensions Bill.

The Chancellor has now confirmed that this change will be introduced a year earlier, from 2016.

Abolition of DB contracting-out

A key consequence of a single tier state pension is the abolition of DB contracting-out. Currently, members and employers of occupational schemes that are contracted-out on a DB basis benefit from reduced NICs.5

In his Budget speech, the Chancellor confirmed that, as provided for in the draft Pensions Bill, private sector employers will be able to adjust their schemes to take account of the cost of losing this rebate. Full details are expected to be set out in regulations.

Pensions tax relief

The Budget also confirms a number of changes to pensions tax relief originally announced in the 2012 Autumn Statement.6

The Lifetime Allowance

From the tax year 2014/15, the LTA will be reduced to £1.25 million.7

The LTA is the total amount of tax relieved pension savings that an individual can build up over their lifetime in a registered pension scheme, without incurring an additional tax charge. For this purpose, DC benefits are assessed by reference to the individual’s pot. For DB savings, it is the capital value of the pension, using a factor of 20.

Transitional protection will be available in the form of “fixed protection 2014”, based on the fixed protection regime introduced from April 2012 when the LTA was reduced to £1.5 million.8

Fixed Protection 2014

Fixed protection 2014 will allow an individual to maintain an LTA of the greater of £1.5 million and the standard LTA. Like the current fixed protection regime, this new protection will be lost:

in a DC arrangement, if contributions are paid to the scheme by the member or someone else on their behalf, or employer contributions are paid;
in a DB arrangement, if the pension and lump sum rights of a member increase by more than the “relevant percentage”9 at any time during a tax year. The test for benefit accrual can occur at any time up to the point when benefits are actually taken;
if a new arrangement is established in respect of the individual; and
on a transfer, subject to certain limited exceptions.

Individuals will be able to apply for fixed protection 2014 after the Finance Bill comes into force (expected to be in summer 2013). A signed application form will need to be received by HMRC by 5 April 2014.

Personal Protection Regime

In addition, the Government is planning to offer an individual protection regime for those with pension rights above £1.25 million when the standard LTA is reduced in 2014.10 It is intended that this personalised protection would entitle individuals to an LTA of the greater of the value of their pension rights on 5 April 2014 (up to an overall maximum of £1.5 million) or the standard LTA. But in contrast to the rules for fixed protection 2014, “individuals with personalised protection would not be subject to any restrictions on future contributions or accruing further benefits”.

The Budget notes that the Government “will consult on the detail in spring 2013 and legislation will be included in Finance Bill 2014”.

Annual Allowance

The AA limits the amount of tax relief available on pension savings paid by or in respect of an individual to a registered pension scheme. Where pension savings exceed the AA, an AA charge applies.

From 6 April 2014, the AA will be £40,000, representing a further £10,000 reduction on an allowance that was £255,000 as recently as April 2011. The position is further exacerbated as the DB conversion factor was changed from April 2011 from 10:1 to 16:1.

Where an individual’s total pension savings in a particular tax year are more than the AA, they may be able to carry forward any unused allowance from the previous three years to the current tax year. The amount of any unused allowances arising from the tax years 2011/12 to 2013/14, which is available for carry forward to 2014/15 and subsequent years, will still be based on the current £50,000 limit. However, from the tax year 2014/15 onwards, carry forward will be assessed by reference to £40,000.

In other pensions news

A number of other announcements were made relating to pensions:

Equitable Life: A one-off ex-gratia payment of £5,000 is to be made to those policyholders who bought their Equitable Life “With Profits Annuity” before 1 September 1992 and who were living at the time of the Budget announcement. A further £5,000 will be available to those policyholders who meet these criteria and who are in receipt of Pension Credit.
Family pension plans: as originally announced in the 2012 Budget, from 6 April 2013, contributions to a registered pension scheme for an employee’s spouse or family member as part of the employee’s flexible remuneration package will give rise to tax and NIC liabilities on both the employee and the employer.
QROPS: also first announced in the 2012 Budget, QROPS will need to re-notify HMRC every five years that they continue to meet the requirements to be a QROPS. Former QROPS will also have to continue to report payments out of transfers received while they were a QROPS. Additional reasons for excluding a pension scheme from being a QROPS will be included in the Finance Bill 2013.
Pensions drawdown: As previously indicated, an increase in the capped drawdown limit from 100% to 120% will apply from 26 March 2013, for pensioners of all ages with these arrangements. However, the Government has also commissioned the Government Actuary’s Department to review the pensions drawdown table, and the underlying assumptions used to provide drawdown rates, to make sure they continue to reflect the annuity market.

Finance Bill 2013

Many of the above changes and other measures which have been announced previously will be included in the Finance Bill 2013. The Bill is due to be published on 28 March 2013 and is expected to come into force in “summer 2013”.

1 Please see our Alert: “Pensions and Growth – A call for evidence” (29 January 2013)
2 Please see Sackers’ response to the DWP’s Call for evidence (21 February 2013)
3 The Government is also consulting on a new “growth duty” for non-economic regulators, which it may apply to TPR, depending on the outcome of that consultation
4 Please see our Alert: “Pensions White Paper” (15 January 2013)
5 At present, if an individual is contracted-out, the employer and the employee pay NICs reduced in total by 4.8%
6 Please see our Alert: “Autumn Statement 2012” (6 December 2012)
7 Members with a protected LTA (under either enhanced or fixed protection) will be unaffected by this change
8 Please see our Alert: “Fixed Protection: the deadline approaches” (27 February 2012)
9 The relevant percentage is the rate specified in the scheme rules on 9 December 2010 by which a member’s rights are increased annually or, where there is no such rate, the annual rate of increase in the Consumer Prices Index (CPI) for the year ending with the previous September’s CPI figure
10 Please see our Alert: “Finance Bill 2013” (13 December 2012)