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The new Pensions Bill: Some points for Family Lawyers

Steve Dixon, an actuary with Bradshaw Dixon & Moore, provides a short note highlighting the family law implications of the Pensions Bill currently progressing through Parliament

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Steve Dixon BA, FIA Director, Bradshaw Dixon & Moore Ltd

The latest Pensions Bill, currently going through Parliament, is mostly about establishing the new semi-compulsory pension scheme called "Personal Accounts" and the establishment of the Personal Accounts Delivery Authority to run this new scheme. This note will deal with that in more detail later but, first, let us deal with the other bits which may be of more interest to family lawyers.

Firstly, the Bill brings in a major change to the statutory revaluation and indexation requirements for final salary pension schemes. At present, schemes are required to increase pensions in deferment by either the increase in the Retail Price Index (RPI) over the period between date of leaving and the retirement date (rounded down) or 5% a year whichever is lower. After retirement, schemes are required to increase pensions in payment by the lower of the annual increase in RPI or 5% each year. These are major protections to members of schemes from the effect of inflation. The Bill will remove the 5% and replace it with 2.5% for all service accrued on or after the date the Act comes into force. Therefore, schemes will have to split deferred benefit statements showing pensions accrued before some time in 2008 and that accrued after that date. Schemes will reflect this lower inflation protection in Cash Equivalent Transfer Values and Cash Equivalent Benefit statements so these will fall gradually as more and more of the service considered is after this date.

The aim of this change is to try to encourage employers to keep schemes open by making benefits cheaper (due to lower quality of indexation) in the future. The government is using the excuse that the Bank of England will keep "inflation" at 2% without mentioning that projecting Consumer Price Index (the Bank of England target) at 2% is roughly equivalent to broad inflation (measured by the RPI) of between 2.5% a year and 3% a year. (Note to nerds – CPI is a geometric average and will, therefore, increase by less than RPI which is an arithmetic average just due to maths). Therefore, people's benefits will decline in real value. At present, a market view of future long term RPI increases taken from differencing the yields guaranteed by the government on their fixed interest bonds and their indexed bonds is about 3.5% a year.

The second change that family lawyers should be aware of is that pension credits created by pension sharing orders will now be subject to protection by the Pensions Protection Board. The Board has to provide compensation to the individuals credited in the same proportion as the sharing order. Cash Equivalent benefits are also payable if appropriate. The payments will be subject to the same proportionate reductions that the Board can apply to their normal payments to scheme members. The Board can also impose charges for applying a pension sharing order and will split the charge in the same proportion as the order applies.

Most of the Bill is taken up by the latest attempt by the government to reduce the means tested benefits bill: Personal Accounts. This will be a pension scheme that everyone will have to contribute 5% of their earnings to (unless they are in a good quality scheme) with their employers being forced to contribute 3%. Tax relief should reduce the 5% to 4% (at current 20% tax rates). Individuals will have the right to "opt out" of the scheme but will need to do this every three years as they will be automatically opted back in 3 years after opting out. There is a degree of cynicism in the pensions market on this innovation due to the fact that the government has not said what the impact is on low earners' means tested benefits from having modest amounts of pensions from these accounts (and they will be modest – no more than 20% of income at age 65 for people on average pay and even less for low earners).

The Personal Account will be provided by a Personal Account Delivery Authority. The aim is that these centralised accounts will be cheap to run. However, HMRC have ruled out collection of contributions through PAYE (which is the only simple cheap solution of contribution collection centrally) due to the fact that their own systems could not cope. The government has also stated that collection costs will not be subsidised by the taxpayer. It is not hard to see who is likely to pick up the costs – employers. Something to be aware of for family lawyers' firms' costs in the future.

The new Personal Accounts are supposed to be available from some time in 2012.

Steve Dixon BA, FIA Director, Bradshaw Dixon & Moore Ltd
www.bradshawdixonmoore.com
info@bradshawdixonmoore.com

This article has also been published on The Ancillary Actuary, Bradshaw Dixon & Moore's blog: www.ancillaryactuary.co.uk.