Hewitt Associates Comments on the UK's Pre-Budget Report
22 December 2009
Hewitt Associates, a global human resources consulting and outsourcing company, has commented on the UK's Pre-Budget Report (PBR).
Overall comments
Lynda Whitney, pensions consultant at Hewitt Associates said: "The changes outlined today for pensions are only likely to cause more cost, more confusion and more uncertainty. Pension scheme administrators are likely to struggle with the deadlines that are now imposed upon them, while members affected by the changed salary definition will struggle to understand what their tax bill is going to be."
Changes to pensions tax relief
Regarding the changes to pensions tax relief, Martin Bird, principal consultant at Hewitt Associates, said: "It is estimated that we will now see an additional 70,000 individuals caught by the new salary definition moving from £150k to £130k. This measure means that more people will be caught, while there will also be more uncertainty as we won't know how the rules will interact with other areas of pensions' taxation, and there will be yet more complication in the system.
The Government is introducing more obligations on employers, scheme administrators and trustees, all of which will add to the costs of running schemes. Once again, pensions 'simplification' is right out of the window."
Changes to public service pensions and longevity
On changes to public service pensions and longevity, Bird said: "Longevity improvements have been a key contributor to increasing the cost of public sector pension provision and also to the increasing difference in value between public sector and private-sector pension provision. Effective cost-sharing would limit both the cost to the public purse and further growth of that differential."
Tax-efficient measures
Regarding tax-efficient measures, Tony Baily, principal consultant at Hewitt Associates, said: "The Government estimates that 300,000 people will be subject to the change in pensions taxation. However, in practice, many people won't pay it. We are seeing increased interest from our clients for putting in place tax-efficient alternatives to pensions, such as employer-financed retirement benefit schemes (EFRBs) and employee benefit trusts (EBTs). Employers need to start considering putting in place such alternatives to ensure that their total reward is well-targeted.
Given the UK Government's stated policy of restricting tax relief for the highest earners, it was never going to be easy to implement this tax with the conflicting objectives of fairness and simplicity. The Treasury seems to have struck a suitable balance but — ironically — not many people are likely to pay the tax."
Changes to national insurance contributions
Baily continued, with regard to changes to national insurance contributions: "Given the full 1% increase to National Insurance contributions (NICs), pensions salary sacrifice becomes even more valuable for both employers and employees. Hewitt research has shown that only one in three employers offers salary sacrifice, but the savings in NICs for employers and employees could make this a more and more attractive approach to take. We would expect to see an increase in the number of schemes that are put in place."
Senior executive remuneration
On senior executive remuneration, Neil Sharpe, principal consultant at Hewitt New Bridge Street, said: "With the introduction of a new top rate of income tax of 50% next April, many companies have been looking at ways to mitigate the effect of that rise on remuneration for senior executives. These include using incentive plans which fall within the capital-gains tax regime and using family benefit trusts.
Although there was much speculation that the tax benefits associated with these kinds of arrangements would be removed in the PBR, that did not happen and so it is likely that these arrangements will become increasingly popular. However, HMRC has kept the door open to closing them down by announcing that they are considering making those arrangements reportable to HMRC under its tax-avoidance rules."
