The Autumn Statement: Changes afoot?
In his Autumn statement, Chancellor Jeremy Hunt set forth a number of key pensions measures that the government will be seeking to implement in the near future which will affect both defined benefit and defined contribution schemes. This includes changes to the laws and taxation on pension scheme surpluses, as well as bringing forward some of the measures outlined in the Mansion House speech given earlier this year.
Whether the proposed measures have their intended effect (or come into force at all) will be subject to consultation and, potentially, the outcome of the upcoming general election.
In his Autumn statement, Chancellor Jeremy Hunt set forth a number of key pensions measures that the government will be seeking to implement in the near future.
The abolition of the lifetime allowance was confirmed to be on schedule to take place by 6 April 2024. There were rumours that it may be pushed back to 2025 but it appears that the government is keen for this measure to be pushed through ahead of the general election, despite the tight timescales and the problematic early drafting. The new provisions are expected to significantly alter the reporting requirements of pension schemes to HMRC, and challenges remain as to how trustees will be able to administer the new arrangements.
Mansion House reforms
The Chancellor made it clear that the government is pressing ahead with the Mansion House reforms introduced earlier in the year. One of the key aims was to move towards fewer, larger defined contribution schemes and for the majority of these pots to be managed in larger schemes worth over £30bn by 2030. The argument is that this will not only unlock funds for investment in emerging markets but also improve member outcomes in reducing the issues surrounding small pots. To this end, the government has announced plans to consult on a legal right for workers to require their new employer to pay pension contributions into an existing pot, rather than the employer’s own scheme. The government is also launching a call for evidence on a “lifetime provider model” (also referred to as a “pot for life”) to help simplify the market and allow individuals to move to having one pension pot for life, also noting that it will introduce the multiple default consolidator model to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000. This may have the effect of increasing the administrative burden on trustees of schemes with defined contribution sections in the future.
As part of the Mansion House reforms, the government announced that it will also be consulting on proposals for the Pension Protection Fund to act as an investment vehicle for small defined benefit schemes. This would give smaller schemes deemed unattractive to commercial providers the opportunity to invest in “productive finance” whilst fully protecting member benefits. It is proposed that the public sector consolidator will run by 2026.
The Chancellor announced that the government will consult on changes to the rules around when defined benefit scheme surpluses can be repaid and look to introduce measures to protect members as part of an overhaul to the current regime. It was also announced that the current 35% tax rate on extracted surpluses will be reduced to 25% from 6 April 2024.
The tax charge has been a particular problem, put in place when corporation tax rates (the tax saved when making pension contributions) were much higher, but this is not the only problem with surpluses. The process to repay them is complex and often (depending on scheme rules) unavailable.
The problems around surplus repayment therefore strongly discourages employers from funding already well funded pension schemes, because of the risks of not getting any surplus returned. It has also affected employer attitude towards moving to the insurer market, given the improved funding levels in recent times leading to more schemes in a surplus.
The proposed changes, therefore, are welcome and would go some way to tackle the current issues with extracting scheme surpluses.
It is hoped that the proposed changes will address the long-standing issues of small pots and difficulties in extracting scheme surpluses that currently exist in defined contribution and defined benefit schemes respectively. The pensions industry will wait on the outcomes of the general election and respective consultations with bated breath.