Negative CPI inflation freezes pension benefits next year
The announcement on Tuesday that the Consumer Prices Index fell by 0.1% over the twelve months to September 2015 comes as no surprise as for much of 2015 this measure has been hovering at or below 0%. But it will be of concern to those hoping for increases to their pension benefits next year as it is the September to September figure that feeds into required upratings. The Retail Prices Index increased by 0.8% over this same period.
The ever so slightly negative CPI change will have the following impacts:
- Thanks to the triple lock, the Basic State Pension will now increase next April either by 2.5% or by the increase in national average earnings (likely to come in higher than 2.5%) – whichever applies it will be a substantial increase in real terms
- By contrast, SERPS and S2P entitlements are likely to experience no uplift next April
- Next year, occupational pension schemes that apply the Limited Price Indexation rules to pensions in payment will not have to increase pensions, nor should they have to increase those GMPs that accrued after 5 April 1988
- The minimum revaluation of that part of a deferred pension in excess of any GMP will incorporate this period of falling prices, but only for revaluation periods of more than one year; and
- For those accruing defined benefits there will be no inflation allowance made before such accrual counts as using up the annual allowance for pension input periods ending in the 2016/17 tax year
Comment
We are told that this near zero period of CPI inflation will pass and that deflation fears are overdone. But trustees may have a difficult time next year when they come to explain to their membership that there will be no increases to benefits, whilst the Basic State Pension continues to forge ahead.
How long can the triple lock endure?
This is the question that is not being directly posed by the Government Actuary’s Department in its recent paper ““Triple lock” increases to state pension”, but the GAD paper, apparently published in error and since withdrawn, indirectly contributes to the debate to come as it exposes the potentially high accumulative cost of a policy that was set in the previous Parliament and has been promised to endure for the current one.
The triple lock is the promise to increase the Basic State Pension each year by not less than the increase in national average earnings, CPI and 2.5%. By contrast the Government is only required by law to apply an earnings increase.
Since the policy became effective in the 2011 round of increases the 2.5% underpin has applied twice. In total the triple lock (including two years where CPI was the highest measure) has increased the Basic State Pension by around £10 per week more than would otherwise be the case – equivalent to a 7% increase in projected benefit expenditure from the National Insurance Fund (around £6bn pa). If the policy were to continue the GAD finds that under a “new normal” where low inflation and low earnings growth becomes more commonplace than historically, the triple lock (largely due to the 2.5% underpin) would increase benefit expenditure by a further 11% by 2040 and by 41% by 2070.
The GAD also finds that these projected costs would reduce significantly if a reduced level of underpin applied.
Comment
The triple lock has been a creature of necessity, but it seems unlikely to survive much beyond the present Parliament in its current form. It was unfortunate that the timing of the restoration of the earnings link on a State Pension that had become wholly inadequate coincided with a period of very poor earnings growth.
It would not be surprising to see the 2.5% underpin reduced in future years, but before then the Government needs to decide how to increase the single tier state pension. Just as with the Basic State Pension, the Government is only required by law to apply an earnings increase. Will it in 2017 do just this, or will (as the GAD has assumed in its calculations) the triple lock apply to it too?
ACA asks Government to address contribution inadequacy as it publishes 2015 pension trends survey
The Association of Consulting Actuaries argues for the Government to adopt and publish a “next step" strategy as the first phase of auto-enrolment draws to a close, in order to address the potential danger of rising opt-outs as employers and their employees – particularly small and micro-employers – react to the increase in minimum contributions in 2017 and 2018.
In publishing the first report of its 2015 pension trends survey, the ACA says that greater ambition is needed to convince employers and employees alike to save more to improve retirement incomes, with the Government reviewing its spending plans, tax rates and incentives to help make this happen.
Amongst the suggestions being made are that:
- The minimum auto-enrolment contributions should rise by 1% every two years after 2020 until they reach a combined contribution of 16% (taking account of however tax relief will operate following the current consultation)
- A standing Independent Retirement Commission should be established charged with promoting the active extension and betterment of private retirement income provision and making recommendations on the future of State and public sector retirement provision
- Greater incentives for lifetime savings should be provided by allowing early access after 10 years of pension savings to a proportion of the fund currently available only from age 55; and
- Employers should be given tax breaks to incentivise the provision of savings and retirement advice
Comment
Contribution inadequacy is an issue that successive Governments charged with implementing the hugely successful auto-enrolment policy have yet to tackle. But if the Pension Commission’s replacement income ambition is to be realised it is clear that this issue must be addressed, especially in the private sector.
How should the financial advice market be reformed to empower and equip consumers to make effective financial decisions?
This and other fundamental questions are the subject of a joint Treasury and FCA review led by the FCA’s acting chief executive, whose terms of reference were this week updated so that the remit is to examine:
- The advice gap for those people who want to work hard, do the right thing and get on in life but do not have significant wealth
- The regulatory or other barriers firms may face in giving advice and how to overcome them
- How to give firms the regulatory clarity and create the right environment for them to innovate and grow
- The opportunities and challenges presented by new and emerging technologies to provide cost effective, efficient and user friendly advice services; and
- How to encourage a healthy demand side for financial advice, including addressing barriers which put consumers off seeking advice
The consultation document published this week is wide-ranging, looking at the current regulatory system and seeking evidence of problems within it which present barriers to customers getting the right advice.
Consultation closes on 22 December 2015. The intention, amongst other things, is that a package of reforms will be generated, perhaps ahead of the 2016 Budget, that are designed to empower and equip consumers to make effective decisions about their finances including reform of both the regulatory system and the establishment of a broad based market.
Comment
This is a very ambitious review looking at the whole gamut of financial advice, not just pensions (although this is mentioned many times and at the complex end of the needs spectrum). The advent of pension flexibility has exposed the weaknesses of the financial advice market and it may be that the political will now exists to do something. What the something is though, is not readily apparent.
Salary sacrifice to continue to create complexity within the tapered annual allowance
As the Finance Bill reaches Committee Stage, the Government has only tabled, and the Committee agreed to, three “error-fixing” adjustments to its pension clauses.
Two relate to the tapered annual allowance for 2016/17 onward and interim changes before (see Pensions Bulletin 2015/32 and our July 2015 News Alert) and one to a “Freedom and choice” provision.
Comment
Given the complexity of pension tax legislation it is no surprise that the Government has needed to propose these error fixes. However, we are disappointed that it did not also propose the removal of the new salary sacrifice addback for the purposes of the tapered annual allowance’s threshold income test. As the ACA has pointed out (see Pensions Bulletin 2015/35), this does not seem to achieve any political aim and will cause significant headaches for employers. For the moment, the key HMRC guidance as to how the provisions should be read is appended to the ACA letter.
State pension top up facility now available
From this Monday it is possible for anyone reaching state pension age before 6 April 2016 to pay “Class 3A” national insurance contributions (see Pensions Bulletin 2013/53) to secure an additional state pension of up to £25 per week. The scheme will remain open for 18 months.
To coincide with this go live date, the Government has updated its guidance for pension advisers on the subject.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
