Commenting on today’s budget, Charles Cowling, Director at JLT, said:
“Bringing forward the Â£144 single tier State pension to 2016 is a good move but there remains a question mark over the millions of people contracted out of the current State pension. It is unclear whether the apparent outcome for different groups is a matter of accident or design and, if intended, what the public policy reasons are for the resultant treatment.
“This is though just a small part of a very welcome big picture. We applaud the simplicity and sustainability of the new State pension and commend the decision to bring forward the timetable for change. This will further support the workplace pension reforms that started to take effect last year and which have, so far, been very successful.
“Employers with contracted-out schemes do though need to understand that all contracting-out will end and, therefore, the National Insurance rebate ‘tap’ will be switched off in just three years time. Unless they are happy to incur higher costs, they need to start reviewing their schemes well in advance of 2016.
“With proper planning, the reforms could be viewed by companies as an opportunity to redesign schemes in order to achieve a lasting settlement for workplace pensions, complementing the long-term intentions for the new State pension.
“Employers do though need to be supported in terms of their ability to redesign their pension schemes without their plans being bogged down or even derailed by red tape.
“Related to this is clarity over the Government’s plans for sharing of pension risks through ‘Defined Ambition’ schemes. The Pensions Minister has acknowledged the importance of DA being in place when contracting-out is abolished. The accelerated timescale for State pension reform means that we need more detail now, if defined ambition is to be part of the pensions landscape after 2016.
“Finally, amidst all the headlines about the State pension, we should not lose sight of further reductions to the tax allowances on pensions input and output that take effect in April 2014. The reduction in the Annual Allowance for pension saving, in particular, could affect thousands of people and not just high earners. From next year, annual pension entitlement only has to increase by Â£2,501 for the Annual Allowance tax charge to become an issue for a member of a final salary pension scheme.
“There was no mention in the Chancellor’s statement about introducing methods – such as long-dated “infrastructure bonds” – which would encourage pension funds to invest in large-scale projects. The Government should look at this as a matter of urgency. An infrastructure gilt, whose risk is underwritten by the government, would be an ideal investment proposition for pension fund managers with large pools of capital to deploy and would help kick start the economy.”