Draft Finance Bill 2013: Ed Wilson looks at the pensions measures in the draft legislation
December 11, 2012
There were several different areas relating to pensions that were covered in the draft legislation. I’ve covered the main points below, but as always, the devil is in the detail.
Restrictions in annual allowance and lifetime allowance from 6 April 2014
After the announcements in the Autumn Statement, draft legislation sets out that:
- the annual allowance will be reduced from £50,000 to £40,000; the ability to carry forward relief for rolling three year periods continues to be available
- the lifetime allowance will be reduced from £1.5m to £1.25m; for most people this will also restrict the tax free cash that may be taken to £312,500, and
- fixed protection will again be available provided an individual registers by 5 April 2014; but after that date he or she must cease active membership of DB schemes and cease contributing to any DC arrangements. This is similar to the fixed protection introduced in 2012.
The Government is also to consult on a new form of personalised protection which will provide a lower level of cover but will enable an individual to continue to participate actively in their pension arrangements. We don't yet know how this will work but if introduced it may prove valuable for some employees.
The draft Finance Bill envisages allowing the payment of temporary bridging pensions up to no later than the State Pension Age. Currently this temporary element must have ceased by age 65. This reflects the Government's moves to increase the State Pension Age. But employers need to be careful to ensure that they do not inadvertently increase their liability as the Government reduces the benefits it provides.
This first takes effect for people retiring in 2019 when the State Pension Age starts to increase above 65 towards age 68. Over the longer term, future increases will be linked to improving life expectancy. Our analysis highlights that for someone born today, their State Pension Age will have risen to 77 and to 84 for their children.
Funding defined DB pension schemes – smoothing values of assets and liabilities
We’re waiting for the Government's consultation on the smoothing (or averaging) of assets and liabilities for funding valuations. This smoothing would produce more stable funding results and, in the short term at least, most likely reduce the value of the liabilities as calculated by the actuary.
But smoothing asset and liability values may mask underlying problems and risks leading to decisions being made on misleading management information. Companies will need to consider their actual (rather than smoothed) position in order to formulate their strategy on investments and evaluate the benefits of risk and liability management exercises. They will also need to work with their pension scheme trustees to ensure that they take a similarly realistic view. In preparation, employers need to:
- review what a smoothed set of results might look like
- establish what easement can be achieved in the valuation results and the required cash contributions by applying existing methods, and
- explore any trustee reactions to the proposals.
The Government is also to consult on making it an additional statutory objective for the Pensions Regulator to consider the long term affordability of recovery plans for sponsoring employers. The requirement to consider affordability could mean that smoothing deficits will have little impact on actual contributions paid - they may often already be set to whatever figure is affordable by the company with a reduced deficit impacting only on the length of time over which these are paid.
Providing a separate pension for spouses
The Government announced in Budget 2012 that it would change the law to prevent contributions by employers to pension schemes of spouses of employees made as part of the employee's benefits package.
With effect from 6 April 2013 employer contributions to a pension scheme that is not in respect of an employee will be a taxable benefit in kind on the employee. Contributions made before that date are not affected by this change.Ed Wilson is a director in our pensions practice.