As expected, today’s Budget was pretty quiet from a pensions perspective. While many of the headlines are likely to be reserved for the changes to alcohol duty which will see the prices of Prosecco, draught beer and cider and most wines reduced, as far as pensions are concerned the headline announcements are:
- An increase in the National Living Wage to £9.50 an hour from April 2022, which will feed through to an increase in pension contributions for lower earners.
- The Government has confirmed that it plans to consult before the end of the year on further changes to the charge cap that applies to default funds under DC auto-enrolment schemes to support pensions investment in long-term, productive assets. The consultation will specifically consider “amendments to the scope of the cap to better accommodate well-designed performance fees and enable investments into the UK’s most productive assets, while continuing to protect savers.”
- The Government has said that it plans to address the net pay anomaly for lower earners in pension schemes that operate a Net Pay Arrangement from April 2024. It plans to do this by introducing a system to make top-up payments in respect of contributions made in 2024-25 onwards directly to low-earning individuals saving in a pension scheme using a Net Pay Arrangement. These top-ups will help to better align outcomes with equivalent savers saving into pension schemes using Relief at Source. An estimated 1.2 million individuals could benefit by an average of £53 a year.
As far as the wider economy is concerned:
- In its latest forecast the Office for Budget Responsibility (OBR) has said it now expects the UK economy to grow by 6.5% in 2021 (this compares to the 4% growth it forecast at the Budget in March), followed by growth of 6.0% and 2.1% in 2022 and 2023, respectively. This means the UK economy is expected to return to its pre-pandemic size around the turn of the year, earlier than mid-2022 as previously expected.
- Following the end of the furlough scheme in September, the OBR expects unemployment to peak at 5.2% in Q4 2021, equivalent to around 2 million fewer people in unemployment than suggested in the central scenario published in July 2020. The unemployment rate is then expected to fall to 4.2% in 2024 and remain there for the remainder of the forecast period.
- Inflation is expected to rise further to 4.4% in Q2 2022 before returning to target by the end of 2024. This means that inflation will be significantly higher than the Government’s 2% target and for longer than anticipated.
Although this was a quiet Budget for the pensions industry, many schemes and savers will be concerned about the prospect of a longer period of high inflation than expected.
Low earners stand to benefit from higher pension contributions resulting from the increase in the National Living Wage and from the Government’s plans to address the long-standing net pay anomaly, albeit that measures to address the latter will not be introduced until 2024.
The plans to consult on changes to the charge cap for auto-enrolment schemes had already been widely reported. However, this is unlikely to move the dial unless bigger issues, such as the need for daily pricing in DC schemes, are also addressed.
If you wish to discuss how the new increase in the normal minimum pension age may impact your scheme or organisation please speak to your usual Herbert Smith Freehills’ adviser or contact one of our specialists.