Pensions Bulletin 2018/43 - Budget Special

Our viewpoint

This Budget Special summarises and comments on announcements made in the Speech and accompanying documents which are of potential relevance to pension schemes and their members.  As you can see, the Budget was relatively quiet insofar as pensions are concerned.

Large DC schemes test the patient capital waters

The Government’s “patient capital” plans, announced at last year’s Autumn Budget (see Pensions Bulletin 2017/49), are taking steps towards implementation as several large DC pension providers have committed to undertaking a feasibility study to explore the options for pooling patient capital investment within a joint investment vehicle.

“Patient capital” is a type of long-term capital.  With patient capital, the investor is willing to make a financial investment in a business with no expectation of turning a quick profit.  Instead, the investor is willing to forgo an immediate return in anticipation of more substantial returns down the road.

Providers including Aviva, HSBC, L&G, NEST, The People’s Pension and Tesco Pension Fund will form part of a group chaired by the British Business Bank that is aiming to establish a design for pensions investment in patient capital and other forms of finance for innovative, growing companies.  The Government believes that with long-term investment horizons, a positive cash-flow and £1 trillion in assets forecast by 2025, DC pension funds have the potential to become key institutional investors in UK patient capital.

HM Treasury notes a number of obstacles to pension scheme patient capital investment that are currently being, or will be, addressed, including:

  • The 0.75% charge cap on default DC schemes will not easily accommodate the performance fees associated with patient capital, so the Government will consult in the new year on regulatory changes to ensure investment strategies are not unduly inhibited by fee restrictions “whilst robustly defending existing member protections”
  • The Pensions Regulator has updated its guidance on investment governance for DC schemes to acknowledge there is a place for patient capital in a well-diversified portfolio; and
  • The FCA is consulting on amending areas of its rules to allow further unit-linked investment in a broad range of capital assets, and has also committed to publishing a discussion paper to explore how effectively the UK’s existing authorised fund regime enables investment in patient capital

Together, the pensions investment taskforce and the Prudential Regulatory Authority have already considered the “prudent person principle” for pension scheme investment and do not believe it should prevent pension funds investing in patient capital.


There certainly seems sense in marrying the long-term needs of pension investors with the long-term needs of innovative, growing companies.  But it also seems quite an abrupt U-turn after finally getting a 0.75% charge cap on default DC schemes with previous announcements from the DWP implying the charge cap could be decreased in the future (see Pensions Bulletin 2017/48).  There is a clear tension between protecting members from excessive charges and those same members achieving good long-term outcomes obtained by investing in high-performance investments that incur higher charges.  If the charge cap isn’t appropriate for patient capital investment, one wonders what other desirable investments the cap is currently pricing out.

HM Treasury to continue scaling back index-linked gilt issuance

The Government intends to continue reducing its exposure to inflation shocks by continuing to reduce the proportion of index-linked gilt issuance in a measured fashion over the medium term according to the Red Book.

Reduced index-linked gilt issuance, from £28.4 billion in 2017/18 down to £21.7 billion in 2018/19, was already planned for in the Spring Statement (see Pensions Bulletin 2018/11).  The 2018/19 figures are now expected to be slightly lower still (£21.1 billion), and the Budget shows this is a trend that is likely to continue in future.

Overall, total gilt sales (including fixed interest gilts) over 2018/19 are down by around £8.5 billion on those expected in April 2018 due to a revised central government net cash requirement.


The continued trend away from index-linked gilts may be of some concern for pension schemes with considerable inflation-linked liabilities.  Index-linked gilt issuance is a major source of inflation for liability hedging purposes.  Reducing the supply of index-linked gilts could lead to an increase in their price, which would reduce the available yields and make those inflation-linked liabilities more expensive to fund.

Regulations banning pensions cold-calling move a step closer

HM Treasury has published its response to the short consultation it held this summer on regulations designed to ban pensions cold-calling (see Pensions Bulletin 2018/30).  This consultation was seeking views on whether the draft regulations are robust and effective in delivering the policy intentions, which were in turn formulated following a policy-focussed consultation in December 2016.

The consultation has resulted in some minor technical changes to the regulations, largely to clarify and tighten up on definitions and scope.  The changes made are listed in Annex B of the consultation response together with a note of suggested changes that it was deemed not necessary to take forward.

The response also acknowledges that a key factor in the success of this ban will be raising consumer awareness that pensions cold calling is illegal and the Government is  apparently already working with partners in the public, private and charity sectors to identify how best to ensure that as many people as possible are made aware of this.  When the ban comes into force the Information Commissioner’s Office will also publish guidance to support the industry in keeping within the law.

The intention is still that regulations will be laid in autumn 2018 under the affirmative procedure, but the updated draft now states the intention to, subject to Parliamentary approval, bring them into force “21 days after the day on which they are made”.


It seems likely that this long awaited legislation will – subject of course to the other pressing calls on Parliamentary time – soon come into force.  It then remains to be seen how effective the plans being made by the Government and its partners across all sectors will be in communicating the message as widely and robustly as possible.

Improved pension benefits for public service scheme members and substantial pension cost increases for their employers

The Red Book states that the provisional results of ongoing valuations of public service pensions indicate that changes will need to be made from 2019-20 to make pension benefits more generous for public servants, including teachers, police, armed forces and NHS staff (see Pensions Bulletin 2018/36 for background).

The Budget confirms a significant reduction of the discount rate for calculating employer contributions in unfunded public service pension schemes, from 2.8% to 2.4% plus CPI (in line with established methodology to reflect OBR forecasts for long-term GDP growth).  This will result in additional costs to employers in providing public service pensions over the long-term.

The Chancellor announced new money to support public service employers to ensure that recognition of additional pension costs does not jeopardise the delivery of frontline public services or put undue pressure on them.


The odd combination of significant pension benefit improvements for public service employees and sharp increases in employer costs has been confirmed in the Budget.  While new money is being made available to cover the extra costs (at least in the short term) for the NHS and state-funded schools, many other organisations (including charities, non-state schools, housing associations and private sector employers providing public services) participate in public service schemes.  It is not clear whether any support will be available to help them meet the significant rise in pensions costs from 2019.  See Stuart Levy’s blog for further background.

Another nail in the coffin for RPI?

The Red Book confirms that the Government’s objective is that CPIH will become its headline measure of inflation over time and also that it will reduce its use of RPI “when and where practicable” and introduce no further uses for it from now on.

The House of Lords Economic Affairs Committee is also currently preparing its report on its inquiry into the use of RPI as an appropriate measure of UK price inflation (see Pensions Bulletin 2018/28) and although the discussion in the Red Book does include commentary on why the move away from RPI is complex and could potentially be costly, all parties seem to agree that RPI’s days as a measure of indexation may be numbered.  Despite this, and the fact that “government keeps issuance of potential new debt instruments under review”, there is no indication that index-linked gilts will be moving away from RPI measures of inflation in the immediate future.


If the RPI is actually replaced, this could have a significant impact on those private sector schemes that still use it as the measure for indexing and revaluing their pension benefits.  But presumably the Government will have to stop using the index before it ceases to exist, and there are still gilts with long lives being issued with RPI indexation.

Additional social care funding ahead of green paper

The Budget earmarks an additional £240 million of adult social care funding in 2019/20, in addition to the £240 million announced earlier this month for 2018/19.  There is also a further £410 million for local councils to spend on either adult or children’s social care as they see fit in 2019/20.

But of potentially more interest to pension schemes will be the forthcoming green paper, which will set out the Government’s proposals to put adult social care on a fairer and more sustainable footing.


The social care proposals have been awaited for some time and could have a real bearing on pension schemes, likely to be one of the main vehicles used by members to pay the social care charges they may incur.  The sums of money currently being put into social care show what an issue it has become.

Early increase in personal tax allowance and higher rate threshold

From 6 April 2019, the income tax personal allowance will be increased to £12,500 (from £11,850) and the higher rate (40% tax) threshold to £50,000 (from £46,350), thus enabling the Conservative Government to meet a manifesto pledge a year early.  Those rates will remain fixed for 2020/21, before increasing again in line with CPI from 2021/22.  The Upper Earnings Limit used for national insurance contributions is expected to increase to remain aligned with the higher rate threshold.

The schedule of rates and allowances (Annex A) also confirms that the standard lifetime allowance for pension savings will increase in line with CPI for 2019/20, thus rising to £1,055,000 (this has been rounded up from the “technically accurate” figure of £1,054,800).  The schedule also shows that the full rate of the annual allowance will remain at £40,000 (with the high income taper unaltered) and that the money purchase annual allowance will remain at £4,000 for 2019/20.


We can breathe a sigh of relief since, in this Budget at least, the Chancellor has not made any further reductions or alterations to the annual allowance, tapered annual allowance or £4,000 money purchase annual allowance.

And in other news ...

  • Pensions Dashboard - the Budget confirms that the DWP will consult later this year on the detailed design for Pensions Dashboards, and its proposals for an industry-led approach (see Pensions Bulletin 2018/35 for more background). The DWP intends to work closely with both the pensions industry and financial technology firms and the Budget provides extra funding of £5m in 2019-20 for this
  • The National Living Wage and National Minimum Wage - the National Living Wage, currently £7.83 per hour, will increase by 4.9% to £8.21 per hour from April 2019. The National Minimum Wage also increases by between 3.6% - 5.4% across the various bands
  • Boosting pensions for the self-employed – the DWP intends to publish a paper this winter setting out how the Government proposes to increase pension participation and savings persistency amongst the self-employed. This follows the Government’s statement in its 2017 review of the auto-enrolment system that it would look to use more “nudges” and targeted interventions to boost pensions savings in this sector of the workforce (see Pensions Bulletin 2017/53)
  • No change in the net pay “no tax relief” anomaly for low earners – despite rumours that it might be addressed, there has been no change to the pension tax relief system for low earners which can in effect give a basic rate tax “rebate” to pension savers earning below the personal allowance in relief-at-source schemes, but not to those using net pay schemes (because their earnings will not be subject to tax in the first place)


Whilst it is a relief that there are no major changes to pension issues in this Budget, we are disappointed that the Government has not taken the opportunity to address the “net pay” anomaly in the pension tax relief system for lower earner.

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.

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