The 2015 Summer Budget was as momentous for pensions as it was for housing. While the housing sector saw the announcement of rent reductions and Pay to Stay, the pensions industry was thrown into uncertainty as George Osborne announced a review of pension taxation. After consultation with the industry, it was expected more would be announced in the Autumn Statement, but pension reform was a no show. All eyes are now on 16 March 2016 and the Budget.
Driver for reform
The driver for reform is that, in this time of continued austerity, the £50bn a year of pensions tax relief has long been considered a target of this Government – in the context of other limited savings opportunities it might be considered an easy win. And having now invested so much time into the consultation, pension taxation changes are likely to be significant.
The likely outcome is a move to a single rate of tax relief and the impact will be primarily felt by middle earners. Currently for those earning more than £42,385, it costs 60p to put £1 into their pension. For basic-rate taxpayers, it costs 80p to put £1 in. With a single rate of tax relief, the basic rate taxpayer will be better off, which can only be welcomed, but middle earners will see relief fall – meaning that for 60p, they will likely only get 80p-85p put into their pension. To continue getting that £1, middle earners will have hundreds of pounds less in their pockets.
So this will certainly affect a large swathe of the population, but what’s the direct impact for the housing associations? The issue is in the administration and communication of these changes, which will be extremely complex. And while impact will be felt on both Defined Contribution and Defined Benefit schemes, it will be far more significant for the latter.
It is likely that Defined Benefit schemes will have to carry out a valuation of the increase in benefits, akin to the Annual Allowance calculation, for every member in every scheme. This will be used to assess the tax charge or credit in respect of the member. The scheme will pay or receive the charge or credit, and the member will receive a ‘scheme pays’ style adjustment to their benefits each year. Evidently, administering all of this will be expensive, difficult and may mean that Defined Benefit arrangements no longer represent value for money.
With many housing associations still operating Defined Benefit schemes, most under the Local Government Pensions Scheme or the Social Housing Pension Scheme, the sector is very exposed to pension taxation reform. Come 16th March, it could be the final nail in the coffin for housing associations who are leaning towards a move to a Defined Contribution scheme, and perhaps a tipping point for the sector as a whole.
The fact of the matter is that with more change likely for the housing sector as a whole, a change in the pensions landscape will only bring additional challenge, so while jumping the gun isn’t advisable, an informed and planned approach certainly is.
For a further discussion on any aspect of pensions, please contact Steve Simkins or your usual KPMG contact.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.