Pensions Bulletin 2020/11 - Budget Special

This Budget Special summarises and comments on announcements made in the Speech and accompanying documents which are of potential relevance to pension schemes and their members.

As you can see, the Budget contained little by way of pension news. We start off with the announcement by the Bank of England that it had reduced the base rate to 0.25%.

Bank of England cuts base rate to 0.25%

Ahead of the Budget speech the Bank of England announced a “comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19”.

Central to this is the reduction in the Bank’s base rate from 0.75% to 0.25% on which the Bank’s Monetary Policy Committee had voted unanimously at its meeting on 10 March.

Comment

This along with recent significant falls in gilt yields could put pressure on DB scheme funding positions, depending on how they are currently invested. For those thinking of turning their DC savings into an annuity, the amount they get is likely to be cut.

RPI reform consultation launched

The delayed joint consultation by HM Treasury and the UK Statistics Authority (UKSA) on the reform of the Retail Prices Index (RPI) that should have started in January (see Pensions Bulletin 2020/02) has now been launched.

With general acceptance that the RPI measure is no longer fit for purpose, the key points being consulted on are:

• The effects of changing the RPI formula in 2025, 2030, or any intermediate year – as the UKSA requires the Chancellor’s permission to make any changes before 2030
• The technical method of changing the RPI to CPIH during the year of change

Of as much significance are the elements that are not being consulted on:

• There is no question of whether or not the RPI will change – there is an assumption that it will change
• Whilst the consultation asks about the potential impact of the proposals on index-linked bondholders and the broader issues that would be affected by the changes, there is no mention of whether the holders of index-linked bonds (or any other users of RPI, including uses for pension increases) should receive compensation when the RPI methodology changes

Consultation closes on 22 April and there is a promise that both the Government and the UKSA will respond to the consultation before the Parliamentary summer recess.

Comment

There will be many winners and losers from the proposed changes to the RPI. Pensioners with RPI-linked pension increases in particular will likely be worse off in the long term. However, many of the pension schemes that provide their pensions will end up better off (assuming no compensation is provided to pensioners).

Some of the big losers in the pensions world are expected to be CPI-linked schemes who have hedged with RPI investments, and individuals who have bought RPI-linked annuities from DC arrangements at the point of retirement. This is an important consultation for the pensions industry and we encourage all interested parties to engage with it.

Annual allowance taper thresholds raised – but taper extended for those on the highest incomes

The Chancellor has chosen to address the senior doctors’ pensions tax crisis by raising both tapered annual allowance thresholds by £90,000 for tax years 2020/21 onwards. So, the “threshold income” rises to £200,000 and the “adjusted income” (ie including pension savings) to £240,000. In addition, the taper has been extended beyond the current £10,000 down to £4,000 – a measure that will only impact those with adjusted incomes over £300,000. Proposals to offer senior clinicians in the NHS Pension Scheme the flexibility to choose a personal accrual level before the start of each scheme year (see Pensions Bulletin 2019/35) will not be taken forward.

Since 6 April 2016 the £40,000 annual allowance, above which contributions and/or benefit accrual to registered pension schemes has tax relief clawed back (subject to carry forward provisions) has tapered down to £10,000, but only for those who have threshold incomes over £110,000 and then adjusted incomes above £150,000.

Comment

So, individuals with a threshold income of between £110,000 and £200,000 and adjusted income between £150,000 and £240,000 will no longer be impacted by the tapered annual allowance, but those with adjusted incomes above £300,000 will be subject to an extension of the current taper ending at £4,000 for those with adjusted incomes on or above £312,000.

In terms of the NHS staffing crisis, clinicians whose income no longer exceeds the relevant thresholds should in theory from April be happy to work longer hours and take on extra shifts. However, the continued existence of the taper aspect of the annual allowance may still put off some and as such this Budget feels like a missed opportunity to simplify the pensions tax regime.

Administrators of registered pension schemes will need to modify their systems to accommodate these changes.

HM Treasury to continue scaling back index-linked gilt issuance

Consistent with the Government’s 2018 Budget announcement (see Pensions Bulletin 2018/43), the 2020/21 financing remit includes a reduction in index-linked gilt issuance, from an expected £21.8 billion to an expected £20.6 billion over 2020/21. Since the 2018 announcement index-linked gilt issuance has dropped from 21.7% of total issuance in 2018/19 to 13.2% in 2020/21.

Comment

The rapid reduction of index-linked gilt issuance over the past four years will no doubt help the Government reach its stated policy of reducing its inflation exposure in the debt portfolio. However, with £443 billion still in issue at the end of 2019, some 28% of the total debt portfolio, it will be a long time before this comes down to the Government’s desired level.

For the time being, trustees may be more concerned with how the change in RPI may affect their current holdings of index-linked gilts, than the decreasing issuance that could be purchased to match their pension schemes’ liabilities.

“Net pay anomaly” – call for evidence soon

Concern has long been expressed about the different tax outcomes for those earning around or below the level of the personal allowance and saving into a pension depending on whether they are subject to “net pay” or “relief at source” tax administration on their own contributions.

In the Budget papers the Government has committed to reviewing options for addressing these differences and will shortly publish a call for evidence on this subject.

Comment

Campaigners against this disparity will be disappointed that no concrete proposals were contained in the Budget. We will have to wait a little while yet before we can see the Government’s thinking.

Response to Call for Evidence on coordination of financial services regulatory framework

HM Treasury has published its response to last summer’s Call for Evidence (see Pensions Bulletin 2019/29) in which it outlines some short-term steps to improve regulatory coordination between the various financial regulators as well as the next phase of the review.

Key themes raised by respondents included:

• The need for public bodies to manage the cumulative impact of regulatory change on firms
• Where the policies or objectives of one public body overlap with the remit or objectives of another, the risk of unintended interactions that need to be managed
• Responding to consultations can be resource intensive for firms
• Requests for data can also be resource intensive for firms
• The coordination of supervision for dual-regulated firms
• Automation of supervisory engagement, such as the submission of firm data, could reduce the resources that firms need to allocate to supervisory compliance

To address some of these issues in the short term the following proposals are put forward:

• A Regulatory Initiatives Grid to be launched over the summer, will provide an indicative two-year forward look of major upcoming regulatory initiatives affecting the financial services sector. The Grid will include all publicly announced supervisory or policy initiatives that will, or may, have a significant operational impact on firms. It will be published twice a year and set out an indicative timetable for each regulatory initiative. This should provide a clearer picture of expected regulatory activity, which should mean that firms will be better informed about initiatives which may affect their business, improving their ability to plan ahead. For the regulatory bodies that contribute, the Grid should be a useful tool for managing the overall flow of initiatives
• A co-ordinating Forum to manage the Grid with a membership comprising the Bank of England, PRA, FCA, PSR, CMA, and HM Treasury, as the main contributors to the Grid. A joint statement from several of these regulators welcomed the announcement. Other bodies (such as the Information Commissioner’s Office, the Pensions Regulator and the Financial Reporting Council) will be invited to attend and contribute to the Grid on an ad hoc basis, if and when responsible for a major initiative affecting the sector. The Forum will review the functioning of the Grid and Forum after one year and consider any improvements that may be made to their operation on the basis of feedback from stakeholders and the views of participating bodies

The Government will also consider ways that regulatory technology (RegTech) can be improved for collecting data from firms. However, there are few details given about this.

In the longer term, the next phase of the Review will form part of Government’s upcoming White Paper on Financial Services, to be published in the Spring.

Comment

Whilst this review is not focussed on pensions regulation we certainly recognise some of the key themes raised by respondents! The ideas of the Grid and Forum seem sensible and we hope they do alleviate some of the strain of responding to regulatory requests (or demands) from the myriad of bodies that impact on pension and financial service regulation.

And in other news …

• Lifetime allowance – the standard lifetime allowance that will operate in the 2020/21 tax year will be £1,073,100, up from £1,055,000 in 2019/20 in accordance with expectation (the 12-month rise in the CPI to September 2019, rounded up to the next £100). Regulations will need to be laid before Parliament to confirm the new amount
• Extension to Civil Partnerships: State Pension – following the laying of the Civil Partnership (Opposite-sex Couples) Regulations 2019 (see Pensions Bulletin 2019/42) which extended civil partnerships to opposite sex couples, the Budget provides funding which ensures individuals can derive or inherit a State Pension from an opposite sex civil partner
• Increasing national insurance thresholds – the Budget confirms the Government’s commitment to increase the thresholds at which employees and the self-employed start paying national insurance contributions to £9,500 pa from April 2020 (see Pensions Bulletin 2020/05). This is the first step in meeting the Government’s ambition to increase these thresholds to £12,500 pa
• Collective money purchase pension schemes – the Government will change tax legislation so that collective money purchase pension schemes, introduced by the Pension Schemes Bill, can operate as registered pension schemes

Comment

So, in what was a very big Budget for the country, marking a significant change of direction at the beginning of this Government’s term of office, relatively little happened to pensions.