Budget 2012: Hidden Help for Pensions?
As has been widely reported, the 2012 Budget had little direct impact on private pension saving and occupational pension schemes. Most of the immediate pension implications seem to be implicit
As has been widely reported, the 2012 Budget had little direct impact on private pension saving and occupational pension schemes. Most of the immediate pension implications seem to be implicit consequences of changes to tax rates and thresholds. Existing pensioners, on the other hand, do appear to have taken some of the strain created by the need to increase tax revenues. My personal view is that this is not necessarily unfair as this is the generation who have retired from the golden age of UK occupational pension schemes and will be paying slightly higher tax on a level of income which most future retirees will not reach. But that is not the purpose of this blog posting.
It appears to me that in this year's budget George Osborne may have given a major boost to occupational pension schemes - even if he doesn't know it himself!
A number of the structural problems which exist in UK pension schemes are caused by a combination of the protection of accrued rights (often referred to as "Section 67 protection" - because this is the Pensions Act 1995 section which gives rise to the protection) and changes in actuarial assumptions since pensions promises were made. This creates a mismatch between the cost of what was promised when it was promised and the cost of honouring the promise. There are two main "solutions" - either the employer pays more money than he'd ever budgeted for into the pension scheme, or the member's benefits are reduced. In a defined benefits scheme, the costs fall on the employer and in a money purchase scheme, the pain falls on the member, either by way of a reduced pension, or because he or she has to pay more in or work longer, or a combination of all three.
George Osborne has announced that the state pension age will no longer be set in stone for people of working age. Instead, it will be regularly reviewed in light of prevailing life expectancy (or, for pessimists, mortality). The result is that, in the future, state pension age will not be fixed at a specific birthday until individuals are closer to their retirement.
This creates a fantastic planning opportunity for pension schemes and could even, if there were other economic pressures that make them attractive such as enhanced tax relief, cause a revival of defined benefit pension schemes. This is because rights can now be defined by reference to "state pension age" and so provide for risk-sharing for longevity. With this risk shared, employers may feel more able to offer a form of defined benefit. Logically, employees should not mind too much, as the only event that can cause their pension age to move is an expectation that they will live longer, which is a good thing.
It appears to me that in this year's budget George Osborne may have given a major boost to occupational pension schemes - even if he doesn't know it himself!
A number of the structural problems which exist in UK pension schemes are caused by a combination of the protection of accrued rights (often referred to as "Section 67 protection" - because this is the Pensions Act 1995 section which gives rise to the protection) and changes in actuarial assumptions since pensions promises were made. This creates a mismatch between the cost of what was promised when it was promised and the cost of honouring the promise. There are two main "solutions" - either the employer pays more money than he'd ever budgeted for into the pension scheme, or the member's benefits are reduced. In a defined benefits scheme, the costs fall on the employer and in a money purchase scheme, the pain falls on the member, either by way of a reduced pension, or because he or she has to pay more in or work longer, or a combination of all three.
George Osborne has announced that the state pension age will no longer be set in stone for people of working age. Instead, it will be regularly reviewed in light of prevailing life expectancy (or, for pessimists, mortality). The result is that, in the future, state pension age will not be fixed at a specific birthday until individuals are closer to their retirement.
This creates a fantastic planning opportunity for pension schemes and could even, if there were other economic pressures that make them attractive such as enhanced tax relief, cause a revival of defined benefit pension schemes. This is because rights can now be defined by reference to "state pension age" and so provide for risk-sharing for longevity. With this risk shared, employers may feel more able to offer a form of defined benefit. Logically, employees should not mind too much, as the only event that can cause their pension age to move is an expectation that they will live longer, which is a good thing.