Election manifestos are out and it is open season on high earner pension tax relief

This is the week in which the political parties contesting the General Election have released their manifestos.  The three parties with the greatest representation in the outgoing Parliament have the following to say about pensions and pensioners:

• The Conservatives confirm the policy of flexibility for DC pensions, commit the party to keep the triple lock on the state pension (that guarantees that it will increase by inflation, earnings, or 2.5%, whichever is higher), and to keep pensioner benefits including the winter fuel payment (although applying a “temperature test” so that expat pensioners in hot countries are not eligible).  The commitment to introduce a main residence allowance for inheritance tax purposes will be funded by restricting higher rate pension tax relief on those earning more than £150,000 a year
• The Liberal Democrats commit to make the triple lock permanent, crack down on unfair pension charges, complete the roll out of workplace pensions to nine million people and improve workplace pensions to encourage higher saving

There are a number of pledges in Labour’s manifesto.  They promise to:

• Require pension fund managers to disclose how they vote on top pay at companies they invest in to "improve the link between executive pay and performance"
• Restrict tax relief on pension contributions from the highest earners to fund a cut in university tuition fees
• Retain the triple lock on the state pension
• Ensure that people have time to plan for changes to state pension ages
• Scrap winter fuel payments for the richest 5% of pensioners, but guarantee that there will be no further changes to these payments, free TV licences or bus passes for pensioners
• Reform the pensions market so that pension providers put savers first and protect consumers from “retirement rip-offs”; and
• Support greater flexibility for those drawing down their pension pots, but require proper guidance for people to avoid mis-selling

Meanwhile, both Labour and the Conservatives have provided some details about how they will tax the pensions of high earners.  The Conservatives have said that they will introduce a tapered reduction in the annual allowance to just £10,000 for those earning over £210,000 a year.  Labour has proposed something similar to that suggested in its 2009 Budget, restricting pension tax relief for those earning over £150,000 a year to the 20% rate.  In relation to both proposals the Institute for Fiscal Studies has warned that there would be a very real risk of the pension tax affairs of high earners becoming “chaotic”.

Comment

Although there is not much to choose between the pensions manifestos of the three parties, what is of note is the new focus on pension tax relief, which looks as if it will become a matter for debate and decision in the new Parliament.

Those on higher incomes have had their ability to make significant pension savings reduced in recent years with the cutting of the annual allowance and the reduction in the lifetime allowance, but clearly both of the leading parties want to go further, targeting (for now) the 300,000 or so who enjoy incomes above £150,000 pa.  Both parties justify their policy as being necessary to pay for policies elsewhere, but there is no doubt that they will result in yet further pension complexity.

MF Global case – trading company on the hook for service company pension debt

A company can be held liable for the pension debts of other group companies, the High Court has held.  MF Global UK Ltd (MFG) is obliged to indemnify MF Global UK Services Ltd (Services) in respect of a debt arising under Section 75 of the Pensions Act 1995.

Services employed and then seconded the people who worked in MFG’s business.  Both participated in the defined benefit scheme.  The group went into administration in 2011 and the Section 75 debt was determined as being about £35m.  However, the trustees were advised that a payment of £29m was sufficient to secure the members’ benefits.

As Services had few assets an agreement was reached whereby MFG paid £29m to the scheme on behalf of itself and Services in full and final settlement of the Section 75 debt.  If no settlement could be reached within six months about MFG indemnifying Services for the debt the issue would be put to the Court to determine.

The Court determined that MFG was obliged to indemnify Services on the grounds that there was an implied contract to this effect.

Comment

The case is a reminder that, possibly unexpectedly, one group company can be liable for the Section 75 debts of another even without the Pensions Regulator bringing to bear its moral hazard powers.

Compensation limit for annuities raised to 100%

The Financial Services Compensation Scheme provides compensation for policyholders when insurance companies fail.  The Prudential Regulation Authority has confirmed that the compensation limit for the holders of long-term insurance policies, including annuities is to increase from the long-established 90% to 100%, from 3 July 2015.  The compensation will not be subject to any cap.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.