 By Ben Brown, Senior Consulting Actuary, Buck Consultants
After weeks of speculation, we now know the contents of the 2012 Budget.
For UK pensions, this year’s changes have been less dramatic than rumoured. Speculation that the cap on annual pension savings would reduce to £30,000 (only one year since the cap was reduced massively to £50,000) has come to nothing. So the headline on 2012 Budget Day was that, for UK Pensions, nothing has changed.
However, we did get warnings of changes to come. These cover:
- State Pension Age. Prior to 2010, this was due to increase to age 66 by 2020, then to 67 by 2036 and 68 by 2046. In November 2011, the Chancellor announced that the increase to age 67 would be brought forward to 2028. Now he has said that proposals for further increases will be announced later this year; and
- Pushing ahead with changes to the State Pension, to remove the complications associated with the Second State Pension. This appears to mean a new Basic State Pension rate for future pensioners of around £140 per week.
Then there was the endless tinkering which politicians from all parties seem to love, and which has lead to the current complex pensions system. This includes policies such as:
- A new Pension Infrastructure Platform (for pension plans that can’t find infrastructure projects to invest in);
- The ability to cash in pension pots of up to £2,000, twice in your life;
- Warnings about taxation of unfunded pension plans;
- Corrections to previous legislation on fixed protection;
- Rules targeting loopholes around:
-asset-backed pension contributions;
-pension contributions for family members; and
-Qualifying Recognised Overseas Pension Schemes.
Finally, there were the changes which impact on pensions, but where pensions weren’t the primary focus. So we have:
- 100 year gilts (which aren’t a good match for pension plan liabilities for a closed defined benefit pension plan);
- Increases in personal taxation for pensioners; and
- The increase in personal tax allowances leading to a reduction in the coverage of the new minimum pension contributions under auto-enrolment.
The most challenging of these changes is going to be the new Basic State Pension as it interacts with contracting out rules (both for historic accruals and for future Defined Benefit accruals). Looking at these in turn:
- I believe that the Government will look for consistent treatment of individuals who remained in the State Second Pension and those who contracted out. This means that the single tier new Basic State Pension of £140 per week will have to be reduced for those individuals who contracted-out. In turn, this means that we will continue with GMPs, Contracted-Out rights et al for another 40 years.
The simplest alternative would be for individuals who contracted-out to receive both their new Basic State Pension and their contracted-out pension. This alternative has the major advantage of removing in a stroke:
-the costs (for both pension plans and HMRC) associated with recording, reconciling and administering GMPs and contracted-out rights; and
-the associated reams of legislation.
Its disadvantage is that individuals would effectively double up on this pension, and the Government would have paid out the contracting-out rebates for no reduction in State pension outgo.
- However, the bigger issue is what to do about contracting-out going forward. If this only impacted on the private sector, where most Defined Benefit pension plans are closing to future accrual, this wouldn’t be a concern. The Government would merely end the contracting-out rebate and leave those few remaining contracted-out Defined Benefit plans to deal with the resulting issues. However, the real problem has to be Public Sector pensions. We are in the middle of a protracted period of change to Public Sector pensions, which I am sure the Government doesn’t want to repeat. However, those very Public Sector pension plans are the ones who would be most impacted by the ending of contracting-out. The Government would have three options to deal with this. They are:
-Retain contracting-out in some form. This strikes at the very core of a simple new Basic State Pension system. It stops simplicity being achieved.
-Renegotiate Public Sector pensions again. This effectively means reducing accrual of pensions in the Public Sector plans, to offset the increased new Basic State Pension. After two years of trench warfare on the current changes, it will be interesting seeing if the Government wants to repeat the experience.
-Letting Public Sector workers have both their current pension accrual and the increased new Basic State Pension. Over the longer term, this would be the most expensive option for the Government. However, in the short term, it is the most politically expedient.
My view is that removing contracting out and renegotiating Public Sector pensions is the best way forward. However, it will be interesting to see if the Government ducks this.
So, for UK Pensions, what’s the conclusion from the 2012 Budget?
The technical changes have us pensions consultants busy, but at the high level, it is business as usual, with nothing changing.
However, there are certainly more changes afoot – changes that everyone should keep abreast of in order to ensure they have adequate provision for retirement.
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