Yesterday’s budget was originally going to be a big day for pensions with announcements on the review of pension taxation. However, this was scrapped or deferred, as the political consequences for Brexit put it in the 'too difficult' file for now. In general, there will be a sigh of relief for most of the sector, as Osborne would probably have made the wrong decisions. Even though there are sensible reforms that UNISON and others suggested to the review.
This doesn’t mean there was nothing of interest on pensions. Early in the Chancellor’s speech he mentioned a change in the Discount Rate. I choked on my soup, but most people would be thinking ‘what’s that?’ The Discount Rate is the assumed investment return used in a present value calculation of assets and is probably the most important factor in pension cost calculations.
The current net Discount Rate above inflation (CPI) is 3% and he reduced it to 2.8% with effect from 2019-20. This announcement wasn’t expected because there has been no consultation with stakeholders or an explanation as to why it is being reduced.
The accompanying OBR report explains why this is important:
“the Government has also placed an additional £2.0 billion a year squeeze on departments in that year by raising planned public service pension contributions, in line with a lower discount rate, but not compensating them for the additional costs they will face. This reduces borrowing by displacing other departmental spending within existing expenditure limits, while reducing net spending on public service pensions;”
This means the employers in pay-as-you-go public service schemes (primarily NHS Scotland health boards for UNISON) will have to find another £2 billion pounds from 2019. Health board finance directors will be busy calculating their share of that cost. It doesn’t do anything for pensions; it’s just another Treasury raid on public services.
In a funded scheme such as the Scottish Local Government Pension Scheme the discount rate is an assumption about future investment returns in order to “discount” future benefit payments back to the valuation date at a suitable rate. The Scottish LGPS funds use different discount rates, largely dependent on which actuarial firm is advising them. Some are already using rates that we consider too pessimistic and below the current 3% rate.
When we negotiated the SLGPS 2015 scheme, it was based on a discount rate of 3% above CPI. The rate used in future is a matter for the SLGPS Advisory Board to advise Scottish Ministers, so we are not bound by the Treasury view. The Treasury assumptions are used for the cost share calculations. However, they are only used for calculating the employer contribution cap (currently 15.5%).
The budget also included the expected announcements on pooling of LGPS investments in England and Wales. These are irritatingly called ‘British Wealth Funds’. They are neither ‘British’ because Scotland is not included, or ‘Wealth Funds’ – they are our members deferred pay and not for George Osborne to play with.
Other pension changes in the budget are likely to have a greater impact on our members’ outwith the main public sector schemes.
A particularly welcome announcement was that there will be no change to salary sacrifice schemes. These arrangements allow both employees and employers to reduce their National Insurance liability in lieu of pension benefits. It has been an important way for members to be able to afford pension contributions.
From 2019 a new digital platform will be launched which will provide details of an individual’s entire pension portfolio. Many in the industry doubt that the dashboard will ever come to light; there are simply too many outdated legacy systems still being operated by insurance companies and pension administrators alike.
There is a relatively little used tax and National Insurance free allowance of up to £150 per employee for employer arranged pension advice. This allowance will be increased to £500 per employee from April 2017, which will hopefully enable lower paid employees to access professional advice.
From April 2017 anyone under 40 will be able to open a Lifetime ISA, whereby for every £4,000 saved the government will add £1,000 every year until the age of 50. There are a range of conditions attached. He has also increased the annual ISA allowance from just over £15,000 to £20,000. Precious few of our members will be able to save anything near this sum.
Many industry commentators reckon this is the Chancellor’s way of implementing a ‘Pensions ISA’ via the back door by creating a voluntary one instead. The risk is that it may encourage younger staff to opt out of auto-enrolment, losing out on employer pension contributions. There is also a risk of scams and excessive charges because these schemes are not covered by pension regulations.
The government will also create a ‘new pensions guidance body’, which will replace the Money Advice Service and merge the functions of The Pensions Advisory Service and Pension Wise. They claim this will ensure “consumers can access the help they need to make effective financial decisions”. Highly doubtful.
So, while there were few pension headlines in the budget, there may be some hints as to future direction. For the battered public sector, there are just unnecessary additional costs.