So, the Conservatives return to Government with an 80 seat majority – a result few people predicted in the run-up to last Thursday’s poll. At a macro level, this removes a great deal of the (immediate) uncertainty that has existed since the EU referendum in June 2016. Barring a very unexpected turn of events, we now know that the UK will be leaving the European Union on 31 January 2020. This will be followed by a transition period until at least 31 December 2020. Unless the Fixed Term Parliament Act is repealed, or amended, we are also very likely to have a Conservative Government in office able to implement its manifesto promises and its vision for the future of the UK until at least the end of 2024.
Having said that, over the medium term, several significant areas of uncertainty remain. In particular, what sort of deal will the UK be able to strike with the EU over the terms of our future relationship? When will this take effect? And how will our trading relationships change with the rest of the world, including the United States?
Another big question posed by the election result is – What does the future hold for the Labour party? Will it maintain its position on the left of British politics or return to the centre ground? And who will lead them into this future? The answer to these questions are likely to have a very profound impact on the shape of British politics into the mid-2020s and beyond.
So, at a big picture level, the election answers some questions and raises others. If nothing else, it should get things moving. But what can we expect for pensions?
Directors beware – Tougher pensions regulation on the way
If anyone thinks that a new, unshackled Conservative Government will mean lighter regulation for business – think again, particularly, as far as pensions policy is concerned. Last Thursday’s result means that we can expect the Pension Schemes Bill, which was introduced shortly before Parliament was dissolved, to return to Parliament imminently.
This Bill will introduce:
- new criminal and civil offences (with maximum penalties of seven years imprisonment and a £1 million fine respectively) aimed at directors, investors and, potentially also, lenders, trustees and advisers who take action which, broadly speaking, is deemed to be materially detrimental to a defined benefit (DB) pension scheme without a reasonable excuse, and
- new and enhanced regulatory powers for the Pensions Regulator.
The powers included in the Bill were significantly wider than most people in the pensions industry expected and the industry has called for changes before the Bill is reintroduced. For example, to make clear that trustees are not intended to be covered by the new criminal and civil offences and to ensure that legitimate corporate activity is not inhibited. However, it is unclear if any changes will be made.
Read our previous blog to find out more about the impact of the proposed new criminal offences and regulatory powers.
New scheme funding requirements
The Pension Schemes Bill also contained new scheme funding requirements for DB schemes which are likely to require many DB scheme sponsors to accelerate the rate at which they clear the deficit within their schemes.
These new requirements, combined with the new criminal and regulatory sanctions, are likely to encourage more sponsors to seek to offload their legacy DB scheme to a buy-out insurer or, one of the new DB consolidators (if the new Government enables them to get off the ground), sooner rather than later.
In its manifesto, the Conservative Party pledged to find a solution to the impact of the tapered annual allowance on the NHS. The proposals put forward so far offer only a temporary fix. We hope that the new Government will take a step back and find a permanent solution, not just for the NHS but for the many other sectors that are also feeling the impact of the taper.
The Conservatives also pledged to find a solution to the problem of low earners in net pay schemes missing out on tax relief. Given the nature of the UK’s new electoral map, it is hoped that this issue will rise up the political agenda.
A complete overhaul of the UK’s pensions tax system has been discussed many times before. A major change looked to be on the cards before the Brexit referendum cut short the then Chancellor, George Osborne’s, time in office. Driven by austerity and ideology, George Osborne, was one Budget away from switching the UK pension system on its head by implementing a fully-fledged ISA-style pension savings model.
Consequently, if the EU referendum had gone the other way, it is highly possible that we would now be in the process of transitioning from an Exempt-Exempt-Taxed (EET) pensions tax system to a Taxed-Exempt-Exempt (TEE) system. It will be intriguing to see if a newly emboldened Conservative Chancellor will pick up this mantle.
As far as general taxation is concerned, the Conservatives have committed to raising the national insurance threshold, a change which we can expect to see announced in February’s budget.
The Conservatives committed to retain the triple lock on the state pension. Their manifesto was silent on state pension age (SPA), so we can expect the current timetable for future SPA increases to 67 and 68 to remain unchanged.
There is likely to be an ongoing debate in this Parliament over how to build on the initial success of automatic enrolment. The Conservatives have previously committed to:
- reducing the lower age threshold for auto-enrolment to age 18
- removing the lower earnings limit that is used to calculate contributions so that contributions would instead start from the first pound of an individual’s pay, and
- seeking to identify the best options for extending auto-enrolment to the self-employed.
All eyes will be on how quickly the Government moves to make these changes and on how the debate over the level at which the minimum contribution rates should be set over the long-term unfolds.
Alongside the policies outlined above, we can also expect the new Government:
- to continue its support for the creation of new online pension dashboard(s), and
- to introduce legislation to facilitate the establishment of collective DC schemes.
We would also expect climate change and environmental, social and governance issues more generally to remain high on the pensions policy agenda, particularly if Guy Opperman remains in post at the DWP.
To find out more about the Conservative’s pension manifesto pledges and how they compare with those of the other major parties check out our quick reference guide: