Just a few changes for pensions...
In the spring budget, Chancellor Hunt announced a few changes for pensions.
One key point was to retain the commitment to the triple-lock for state benefits. With many believing this is unaffordable, it will be interesting to see how this plays out in future. General population changes, including a slow-down in average life expectancy, all provide for an interesting debate.
NI contributions will be reduced which will improve baseline income for those affected. It will also however reduce the impact of salary sacrifice schemes. These schemes have been the subject of much debate in the past, but there has been no recent mention of removing them.
In terms of defined contribution pensions, a commitment to a ‘lifetime provider’ and a value test for providers, are proposed initiatives all aimed at improving member outcomes. However, some would criticise that the most important point for the improvement of member outcomes has been missed – increasing minimum contributions under auto-enrolment. It is felt that current levels do not provide a sufficient level of income in retirement. The pensions dashboard also aims to fix issues around multiple pots and so it may not be the right time to introduce another initiative aimed at consolidation.
Finally, the Government is focussed on improving pension fund investment in UK businesses, and as a result will require all defined contribution and Local Government Pension Funds to disclose their UK equity investment. At around 6%, we are currently behind other countries in domestic investment. If investment levels don’t improve, the Government may take ‘further action’. It will be interesting to see if this filters down to defined benefit pension schemes. Trustees have a fiduciary duty to protect member outcomes and so would need to put this above any desire to improve domestic investment.
Navigating Pension changes and initiatives
The industry wasn’t expecting much from the budget given lots of recent changes still to embed (LTA changes, dashboard, general code, funding code). Overall, it does feel light in respect to pensions but with potentially more changes on the horizon depending on how initiatives materialise.
Triple lock: A system of three measures that decide how much the state pension will rise each year. Under the pension triple lock guarantee the state pension increases annually by the higher of either:
- the average rise in inflation as measured by the Consumer Prices Index (CPI) in September of the previous year,
- the average increase in earnings as measured in July of the year before
- or a minimum of 2.5%
Salary sacrifice: A scheme whereby an employee, agrees with their employer, to reduce their salary (or bonus) by a sum in exchange for other, non-cash benefits such as extra pension contributions.
Pensions dashboard: are digital services which savers will use to search the records of all pension schemes to confirm whether or not they are a member. User will be able to see their pension information in one place, including information on their State Pension.
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