29 September 2022
- Markets react as Government announces its Growth Plan
- Health and Social Care levy reversed
- Corporation tax rate rise reversed
- Income tax rate cuts disincentivise pension savings
- UK financial services sector reform promised
- DC charge cap to exclude certain performance fees
- Bill provides for ending of special status of retained EU law
- Pensions Regulator publishes action plan to boost trustee board diversity and inclusion
- HMRC pensions tax statistics for 2020/21 published
- NHS pension scheme reforms announced
On 23 September 2022, the Chancellor, Kwasi Kwarteng MP, delivered his Growth Plan. There was an immediate adverse reaction by financial markets, as a result of which, on 26 September 2022:
- HM Treasury said that the Chancellor will lay out his medium-term fiscal plan on 23 November 2022 and that there will be a Budget in Spring 2023
- The Bank of England, having already raised the Bank Rate on 22 September by 0.5% to 2.25%, said that it was monitoring developments in financial markets very closely in light of the significant repricing of financial assets and that the Monetary Policy Committee “will not hesitate to change interest rates as necessary” to return inflation to the 2% target sustainably in the medium term, in line with its remit
On 28 September 2022 the Bank announced that it will temporarily carry out purchases of long-dated UK government bonds in order to restore orderly market conditions. These purchases will be strictly time-limited and completed from 28 September 2022 until 14 October 2022.
The high levels of government borrowing implied by the Growth Plan have led to huge movements in markets, with significant rises in gilt yields. As the Growth Plan is likely to result in greater inflationary pressure, there may be further rises in yields, which in turn are likely to further improve the funding position of many DB pension schemes which have been seeing significant improvements during much of 2022 as gilt yields have risen.
The Growth Plan contains within it a reversal of the temporary 1.25% point rise in national insurance contributions introduced from 6 April 2022, along with a complete cancellation of the 1.25% Health and Social Care levy due to start on 6 April 2023.
Both measures were announced on 22 September 2022 when the Health and Social Care Levy (Repeal) Bill was introduced to Parliament. This Bill in effect cancels the Health and Social Care levy introduced by the Health and Social Care Act 2021 (see Pensions Bulletin 2021/45). It also cancels the 1.25% point rise in NICs for the 2022/23 tax year – but only for pay periods from 6 November 2022. The new Economic Secretary, Richard Fuller MP, in introducing the Bill, said that funding for health and social care services will be maintained as planned, with the additional funding used to replace the expected revenue from the levy coming instead from general taxation.
The 1.25% point rise in dividend tax due to apply from 6 April 2023 and contained within the Finance Act 2022, will also be reversed.
The return of NICs to 2021/22 levels, whilst welcome for employers and employees, also reduces the tax advantage that can be gained through making employer contributions to pension schemes in place of member contributions through the operation of salary sacrifice.
The Growth Plan provides that the rise in the main rate of Corporation Tax from 19% in the 2022/23 financial year to 25% in the 2023/24 financial year, that was announced in the March 2021 Budget (see Pensions Bulletin 2021/09) and legislated for in the Finance Act 2021 (see Pensions Bulletin 2021/25), is being reversed.
The cancellation of this rise negates the tax logic for DB scheme sponsors of delaying making any needed deficit reduction contribution payments until sponsors could benefit from the higher corporation tax rate deduction that was to be available.
The Growth Plan contains two significant changes to personal income tax:
- The 45% additional rate of income tax, applicable to earnings above £150,000, will be abolished
- The 20% basic rate of income tax will be reduced to 19% one year earlier than planned
Both are to take effect from 6 April 2023, but only in England, Wales and Northern Ireland, as for those in Scotland income tax rates and thresholds are set by the Scottish Government.
There will also be a one-year transitional period for relief at source pension schemes to permit them to continue to claim tax relief at 20% for 2023/24. It is not clear why this is being done, but it should give some breathing space to pension providers when communicating to members.
The reduction in income tax rates makes personal contributions to pensions vehicles less tax attractive. For high earners, the unexpected abolition of the additional rate may prompt some to bring forward pension contributions into this tax year – to benefit from the greater tax relief whilst it is available. Although this may be a bonanza for some high earners, others may be constrained by the annual and lifetime allowances.
The Growth Plan announces that in autumn 2022 the Government will bring forward an “ambitious deregulatory package to unleash the potential of the UK financial services sector”. This will include the Government’s plan for repealing EU law for financial services and replacing it with rules tailormade for the UK, and scrapping EU rules from Solvency II.
We have no further detail on this package yet but would be supportive of changes that will allow insurers to be more competitive. However, it is vitally important that any changes made do not undermine policyholder security.
The Growth Plan says that the Government will bring forward draft regulations “to remove well-designed performance fees” from the charge cap applicable to many DC occupational pension schemes. This relates to a long-standing Government desire to facilitate investment in illiquid assets by such schemes.
The DWP has been looking into this area for some while and in March 2022, in responding to a consultation on the topic, said that it planned to engage with stakeholders before proposing anything further in this area. We understand that the next round of consultation could happen quite soon.
A Bill whose purpose is to bring to an end the special status of retained EU law in the UK statute book was introduced to Parliament on 22 September 2022. Retained EU law is a category of UK law created at the end of the Brexit transition period in order to ensure continuity as the UK left the EU.
The Retained EU Law (Revocation and Reform) Bill provides that all EU-derived subordinate legislation and retained direct EU legislation will expire on 31 December 2023, unless otherwise preserved. That which is preserved will be rebadged in the UK statute book as “assimilated law”. In addition, the principle of the supremacy of EU law, general principles of EU law, and directly effective EU rights will end on 31 December 2023.
Ahead of this date, Government departments and the devolved Administrations will determine which retained EU law can be reformed, which can expire, and which needs to be preserved and incorporated into UK law in modified form. They will also decide if retained EU law needs to be codified as it is preserved, in order to preserve specific policy effects which are beneficial to keep.
To assist with this, on 22 June 2022 the Cabinet Office published a Retained EU law dashboard. This contains over 2,400 pieces of legislation which have been collated as part of a cross-government exercise. This catalogue is to be updated on a quarterly basis, as retained EU law is repealed and replaced, or more such law is identified and added.
The Bill also contains the following:
- An extension mechanism for the sunset of specified pieces of retained EU law until 2026, allowing additional time where necessary to implement more complex reforms to specific pieces of retained EU law, including any necessary legislation
- Provision so that UK courts have greater discretion to depart from the body of retained EU case law, and new court procedures for UK and devolved law officers to refer or intervene in cases involving retained EU case law
- Powers to make secondary legislation so that retained EU law or assimilated law can be amended, repealed and replaced more easily
There is a fair amount of pensions law that emanates from the UK’s time as an EU member state and much of this appears on the Retained EU law dashboard. It seems highly questionable as to whether any serious inroads need to be made into this pensions law, simply because it started life in the EU. However, as with other Government departments, there is likely to be political pressure to remove as much as possible in order to deliver ‘the benefits of Brexit’.
At the very least, when this Bill is passed into law, Government departments including the DWP will have a job of work to ensure that the 31 December 2023 sunset doesn’t result in completely unnecessary disruption to the statute book. There is a real risk that snippets of law are accidentally deleted by this Bill, simply because it was not established in time that they fell under retained EU law and their retention was necessary or desirable.
The Pensions Regulator has published an action plan setting out how it will set trustees clear expectations on diversity and provide practical tools and information on improving diversity, inclusivity, and sponsor engagement.
This action plan was promised in the Regulator’s corporate plan outlining its priorities for 2022-2024 (see Pensions Bulletin 2022/23) and supports the delivery of the third strategic aim set out in its equality, diversity and inclusion (ED&I) strategy published in June 2021 – that is to promote high standards of equality, diversity and inclusion among its regulated community (see Pensions Bulletin 2021/27). The plan has been produced in partnership with the pensions industry and discusses in some detail the work being done by the Diversity and Inclusion Industry Working Group (IWG) that the Regulator set up in January 2021.
The Regulator promises three deliverables:
- To work with the IWG to publish ED&I guidance for trustees and employers by the end of the 2022/23 financial year
- To test approaches and decide on a mechanism for collecting diversity data to inform a baseline to measure progress by the end of 2024
- To continue to engage and work with stakeholders and the regulated community to learn, build experience, and continue to evolve thinking to better support governing bodies
The action plan is published alongside research that shows that too few trustees are currently prioritising this issue; to illustrate: just 10% of DB schemes and 14% of DC schemes were collecting trustee diversity data but of those who were, two-fifths of DB schemes and nearly half of DC schemes said that they had no plans to use the information. Among schemes that were not recording trustee diversity data, 41% of DB schemes and 30% of DC schemes said they had not thought about collecting it, and 35% of DB schemes and 43% of DC schemes felt there was no need to capture the information at all.
The benefits of a diverse and inclusive governing body resulting in wider discussions and therefore potentially better decision-making are evident and it is concerning to see the low levels of engagement from trustee boards on moving this forward. We hope that the practical guidance the Regulator promises will spur on faster progress in this area.
The latest private pension statistics from HMRC show that the estimated cost of pension income tax and national insurance contribution relief has increased once more (the headline figure for relief for both sources, net of tax paid by today’s pensioners, is given as £48.2bn up from £44.5bn in 2019/20).
They also show an 11% increase in the total of lifetime allowance charges paid for 2020/21, but a 23% decrease in contributions/accrual incurring annual allowance charges; we expect that the latter is likely due to the 2020 Budget easements in the thresholds above which the annual allowance is tapered below the standard £40,000 allowance.
For further details and commentary see our press release.
On the figures for the overall cost of pensions tax relief, HMRC states that there have been “improvements” in the methodology used, so previous statistics published are no longer comparable nor provide for early years (what HMRC has done is provide 2019/20 reworked costings to evidence the upward trend). No comment is provided on the reasons for the trend or source of the rise.
The table still has a footnote warning that the figures “are subject to large revisions and have a particularly wide margin for error”. And we agree that it is challenging to get to a methodology that provides a sensible set of figures.
These latest statistics come as the Government is reported in the press as considering relaxing the pensions taxation rules, as part of a further wave of tax cuts. But we may need to wait until the Spring 2023 Budget before anything is firmed up.
On 22 September 2022 the Department for Health & Social Care announced, in its Plan for Patients, that it would make the following changes to elements of the NHS pension scheme to help retain doctors, nurses and other senior staff, to increase capacity:
- Correct pension rules regarding inflation
- Encourage NHS trusts to explore local solutions for senior clinicians affected by pension tax charges, such as pension recycling
- Implement permanent retirement flexibilities and extend existing temporary measures to allow the most experienced staff to return to service or stay in service longer
No further details have been made available by the Department.
When these changes are exposed, presumably for consultation, it will be interesting to see to what extent they will necessitate changes to pensions taxation generally.
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.