Pension tax relief, the new Chancellor and the 2020 Budget
There is less than a fortnight to go now until the first Budget of the Johnson Government is delivered by new Chancellor Rishi Sunak. The run up has been accompanied by rumours of potential changes to pension tax relief which have been particularly strong this year.
In a new publication launched on 26 February, LCP partners Steve Webb and Alasdair Mayes look at the main topics that the Government may be considering around pension tax relief – namely:
- Pension tax for higher earners where the Government has given the clearest indication that a Budget announcement is to be expected, not least to deal with serious workforce issues in the NHS
- The ‘net pay’ issue affecting lower earners where, at the very least, we could expect a Budget announcement of a review
- Radical structural reform – one of which, a move to ‘flat rate’ relief on pension savings, has been floated in recent weeks
Their paper takes each topic in turn looking at the pros and cons of reforms in these areas.
Comment
Although recent Budgets have generally had little to say on the subject of pension tax, there are strong reasons to think that Budget 2020 will be an exception. The Conservative manifesto raised two specific areas of concern around pension tax, whilst the overall fiscal position means that larger scale reform may be considered given the large and growing cost of the pension tax relief system as a whole.
HMRC delivers first tranche of GMP equalisation guidance
On 20 February HMRC published the first tranche of its long promised guidance on the pensions tax treatment of equalising for GMPs. It is helpful, but only in part.
As expected, it relates primarily to the tax implications of “dual record” approaches. Further guidance on the treatment of lump sums and death benefits is promised by HMRC “as soon as possible”.
The guidance confirms that, as anticipated, implementing equalisation of benefits earned between 17 May 1990 and 5 April 1997 for unequal GMPs using any of the three “dual record” approaches should not normally have any unexpected pension tax implications for members. In particular, it should not usually trigger annual allowance usage or loss of either annual allowance deferred member carve-out or Fixed Protection.
However, HMRC's approach does create a burden on scheme administrators, who are required to rework historical lifetime allowance calculations for many pensioners to reflect any increased pension. A practical and proportionate approach may be required in this area and we hope that this will be addressed in future guidance from the PASA-chaired GMP Equalisation Working Group.
In October 2019 HMRC said that the tax issues involved when equalising using GMP conversion were proving to be more complex to resolve (see Pensions Bulletin 2019/42). The February guidance goes further, confirming that “there may be consequences for some members” if conversion is applied, which for example “may result in either the loss of deferred members carve-out or fixed protection, or both”.
There is currently no indication of when or even if HMRC will be able to provide reassurance or solutions to issues such as these; just that it will “continue to explore the tax implications”.
The ruling in the Lloyds Banking Group case effectively stated that past underpayments to pensioners need to be calculated using one of the three “dual record” methods (even if a scheme chooses to follow the GMP conversion approach for future benefits). The HMRC guidance is therefore helpful in giving clarity on the pensions tax treatment of these arrears. Many pension schemes may now wish to begin the process of calculating comparator records and arrears payments.
Comment
The guidance provides the tax certainty required for schemes who wish to follow a “dual-record” approach for future benefits. By contrast, the lack of progress by HMRC regarding when and whether GMP conversion is a viable option for equalising future benefits for all members is frustrating. There is also silence from DWP on anticipated changes to its conversion law. Many schemes wish to follow the conversion route for future benefits, but they cannot make progress until there is news from both HMRC and DWP.
Pension Schemes Bill – Committee stage reached
On 24 February the House of Lords started its line by line reading of the Pension Schemes Bill. The list of proposed amendments has grown significantly in recent days, with precisely 100 amendments tabled for discussion, but the only material Government amendment remains that on climate change (see Pensions Bulletin 2020/06).
Much of that day’s proceedings was taken up considering that section of the Bill dealing with collective money purchase schemes. Sixteen amendments were proposed, only two of which were from the Government and which were accepted. The other fourteen were either not moved or were withdrawn following debate.
The Government amendments were designed to ensure that members of collective money purchase schemes would be protected by an annual charge cap set at 0.75% of the value of the whole of the fund, or an equivalent combination charge. They will also benefit from other existing charge control measures, such as the member-borne commission ban and the early exit charge cap.
The Lords then went on to consider a number of amendments relating to the two new criminal offences concerned with avoidance of employer debt – the Clause 107 provisions on which much concern has been expressed within the pensions industry because their scope ranges way beyond the “wilful and reckless” policy intention.
However, all these amendments were either not moved or were withdrawn following debate. Nevertheless, in the debate, Earl Howe for the Government did outline which offences this Clause is intended to cover, giving three examples:
- The sale of an employer with a DB scheme without replacing an existing parental guarantee over the employer’s Section 75 debt, resulting in the loss of the guarantee, including failing to tell the trustees about the sale in advance
- The purchase of a company, subsequent mismanagement of that company and extraction of value prior to it going into administration
- The stripping of assets from the employer, resulting in a substantial weakening of support for the scheme
He went on to say that “In proposing these criminal offences, it is absolutely not the Government’s intention to interfere with routine business activities”. In response to calls for the persons who could commit the offences to be restricted, he said that this could create loopholes. He also said that the Pensions Regulator would provide guidance on how it intended to apply these and other new powers contained within Part 3 of the Bill.
Significantly, he added that it is expected that the Regulator will consult on the guidance for the new offences prior to the provisions being brought into force. However, whilst the guidance will provide assistance as to how the Regulator intends to use the new criminal offences, it will not be definitive as this is a matter for the courts.
Committee stage continues on 26 February, starting with more proposed amendments relating to the new powers being given to the Pensions Regulator. There are also numerous proposed amendments to the section of the Bill that introduces pensions dashboards.
And towards the end of the Bill many unrelated additions are proposed by a variety of peers, including removing the PPF compensation cap, establishing a Pension Schemes Commission, reviewing the tapered annual allowance and undertaking a review of auto-enrolment policy. All of these hobbyhorses are likely to fall.
Committee stage concludes on 4 March. It appears that the Bill is on track to reach the Commons the other side of Easter, in pretty much unaltered form – other than the climate change addition.
Comment
As we expected, the Government held its ground on Clause 107 and so unless something happens at Report Stage attention must now turn to the promised Regulator guidance. Until we see this, we have just a few words of intent from the Government to stand alongside what, on a reading of the words, is a sweeping new power which will remain of concern to scheme sponsors, trustees and their advisers, all of whom remain exposed to the Clause 107 provisions.
PLSA publishes expanded Stewardship Guide and Voting Guidelines
The Pensions and Lifetime Savings Association has published its 2020 Stewardship Guide and Voting Guidelines. This is an important resource for trustees, providing practical guidance in acting as good stewards of their schemes’ assets, including how to exercise their votes at annual general meetings.
The guide is especially relevant this year, following new regulations that came into force in October 2019 (see Pensions Bulletin 2019/39) requiring trustees of all schemes to understand and disclose how they include financially material ESG factors and undertake stewardship in their investment decision-making.
The guide explains what the new regulations on shareholder engagement mean for scheme investors and outlines key considerations for schemes in building effective stewardship, engagement and voting policies. The guide is intended to be a practical, step-by-step checklist, and includes an easy-to-use table which summarises voting recommendations on issues including executive remuneration, audit, company leadership and dividend policy.
The guide also includes a toughened-up section on climate change and sustainability, reflecting pension schemes’ heightened focus on ESG and the growing number of climate-related resolutions tabled at AGMs. The PLSA says that pension fund investors must be prepared to hold the directors of the companies in which they invest individually accountable on how well they manage climate change risks.
The PLSA believes that voting to hold relevant directors individually accountable is one of the most effective ways for shareholders to use their vote to effect change. However, investors continue to remain reluctant to do so. The PLSA’s review of the 2019 AGM voting season found that although investors continue to express high levels of significant dissent on remuneration-related votes, this is only rarely accompanied by a vote against the Remuneration Committee Chair or the Chair of the Board.
The guide says that the PLSA will be convening a cross-industry group to provide guidance and definitions regarding the substance of the disclosures required under the changes to the Investment Regulations that come into force in October 2020 (see Pensions Bulletin 2019/23). This group will be chaired by Laura Myers of LCP and aims to publish its guidance in the next quarter.
Comment
We are pleased that the PLSA has expanded its guidance in this area, given that the subject matter is vastly increasing in importance. The section at the front about best practice on stewardship is particularly helpful for trustees and the voting guidelines that follow it will arm those trustees who want to delve deeper into their investment managers’ positions.
Dormant assets – pensions to be excluded for now
On 21 February the Government published a new consultation on expanding the dormant assets scheme following last year’s report from industry champions (see Pensions Bulletin 2019/14). The scheme is the initiative to ensure that certain unclaimed financial assets are used for “good causes” rather than simply remaining with financial institutions.
Surprisingly, the Government has gone against the champions’ recommendations to include some pension products by stating it “does not believe that these assets should be included in the scheme at this time”.
The Government justifies this decision by stating that the pensions landscape has undergone significant changes recently, including automatic enrolment, pensions freedoms and the development of pensions dashboards. The Government also believes that pensions dashboards should make it easier for people to reconnect with pension accounts where contact has been lost – if this proves the case then there will not be dormant pension assets to include in the scheme.
Consultation closes on 16 April, following which presumably the details of the expanded scheme will be finalised and brought into operation, but no timescale for either is stated.
Comment
Two years ago, the Government was of the view that dormant pension products should be included in the expanded scheme, so this change of heart is surprising, especially when the champions’ recommendations on pensions was quite limited and unlikely to be affected by the existence of dashboards.
