Further changes to the pensions tax system would undermine public confidence in saving for retirement and could put people off being auto-enrolled into a pension, NAPF warned the Government today, ahead of the Autumn Statement next week.
The NAPF is also alarmed by the impact that quantitative easing (QE) is having on defined benefit final salary pensions and the businesses running them, and it urged the Chancellor to do more to help.
In its Autumn Statement submission, the NAPF argued that another reduction in the annual pension tax allowance would discourage people from saving into a pension at a time when the UK needs to save more for its old age.
The NAPF also argued that pensions tax changes would not only affect wealthy people, but also those on more modest earnings who have been in the same job for many years, including public sector workers. Its analysis revealed that a worker earning around £40,000 a year who saw their salary increase as part of a promotion could suddenly find themselves liable to pay a tax charge from their pension scheme.
Joanne Segars, NAPF Chief Executive, said:
“Our pensions tax system has undergone big changes in recent years. This has added significant costs to businesses and pension schemes, and has damaged people’s confidence in pensions as a way to save.
“Faced again with another change, both employers and employees risk losing confidence in the system and becoming disengaged with pensions saving.
“If the Chancellor goes ahead, it’s not just the rich who will be affected, but also middle earners. Moderate earners paying into a final salary pension who have built up many years of service could be hit with significant, one-off tax bills as a result of modest promotions.
“The Government must not fiddle with the pensions tax regime again. With auto-enrolment now rolling out, it is key that the Government sticks to its commitment to reinvigorating workplace pensions so that employers can provide good pensions and employees can save for their future.”
The UK’s biggest pensions trade body issued its call amidst growing speculation that the Chancellor is considering cutting the maximum amount of annual pension contribution that is exempt from tax, known as annual allowance.
Currently, the maximum amount that people can pay into a pension annually that is subject to tax relief is £50,000. It is believed that the Chancellor is considering cutting this back to £40,000 or even £30,000 a year. The Government reduced the annual allowance from £255,000 to £50,000 with effect from 6 April 2011.
The NAPF also called on the Chancellor to help pension funds deal with the damaging effects of QE, which has contributed to pension fund deficits hitting record levels. Companies are having to direct important resources away from job creation and innovation into filling pension holes, and might decide to shut these pensions down altogether, further undermining the UK’s retirement provision.
The NAPF urged the Chancellor to help pension funds by signalling that an adjustment to discount rates based on gilt yields, or an alternative discount rate approach, is appropriate. This would allow the Pensions Regulator (tPR) to introduce a new approach.
NAPF Chief Executive Joanne Segars said:
“The Chancellor needs to acknowledge the damaging effects of QE for pension funds and the employers offering them. He must give pensions some respite by indicating that an adjustment to discount rates based on gilt yields is helpful. This could free up more cash for businesses to spend on investment and jobs, helping the wider economy.”
QE has forced gilt prices up, reducing the yields that investors like pension funds make on them. This has increased pensions deficits significantly. The NAPF estimated earlier in the year that QE had increased deficits by at least £90bn with the £375bn of QE over the last three years.
Enabling final salary pension funds to apply a discount rate that softens the impact of QE and today’s very low gilt yields could significantly reduce the pension deficits for those currently going through their triennial scheme valuations without compromising the benefits of savers and pensioners.
In its Autumn Statement submission, the NAPF is also urging the Government to:
- facilitate investment in infrastructure by long-term, low-risk investors like pension funds by re-working the procurement process to favour a lower leveraged capital structure. This would ensure that pension funds are not continually outbid by other investors. Currently, the approaches adopted by regulators incentivise high leverage for the purpose of reducing the after-tax costs of capital.
- take full account of any further impact on pension schemes as major holders of gilts when considering the changes being consulted on by the Office for National Statistics.
- issue more long-dated and indexed-linked gilts. There is a lot of demand for these instruments as accounting rules have pushed pension funds down a more risk-averse route.
- press ahead with its plans to reform the state pension into a single flat rate pension set above the level of means tested benefits. This would set a clear foundation on which people can build their own savings.