Surplus - can employers have their cake and eat it?
On 22 November, I gave my initial thoughts on the Chancellor's Autumn Statement. Here I take a closer look at what the announcement means for pension schemes with an actual or potential surplus.
Autumn Statement 2023: Reaction To Announcements (irwinmitchell.com)
I have now delved into the detail in the supporting documents, published alongside the Chancellor's speech.
Headline points:
- Reduction of authorised surplus repayments charge to 25% from 6 April 2024
- Surplus access consultation this winter
Detail:
Tax charge: The authorised surplus repayments charge will be reduced from 35% to 25% as from 6 April 2024, a sign that the Government is earnest about easing surplus access.
Accessing surplus: The DB options call for evidence focused on how DB schemes can invest ‘more flexibly’, and more specifically, increase their investment in ‘productive finance’. One of the things the Government thinks might help drive this is changing the use of surplus and incentivising investment to generate surplus, making access easier and refunds more attractive.
The Government’s response (entitled Call for Evidence Outcome) explains that, overall, there was no agreement as to the road ahead for either surplus extraction or a public consolidator (Questions 3-9 in the Call for Evidence and Chapter 2 of the Government’s response, specifically questions 3, 4, 7 and 9). Nevertheless, the Government will be pressing ahead with its plans, including will be a consultation this winter on a suitable framework for easing employer access to surplus which will cover design, eligibility and relevant safeguards.
Extracts from the Government’s response:
“Limited scheme access to surplus prior to wind-up in the current landscape
19. A large number of respondents suggested the rules of most schemes do not permit extraction of surplus prior to wind-up of the scheme. Respondents estimated that between 15% and 25% of DB schemes allowed for this in their scheme rules, although many acknowledged their responses were based on anecdotal evidence rather than hard data.
20. Respondents described pre-wind-up access to surplus as dependent on individual scheme rules and subject to the full range of scheme circumstances, including funding position, long-term objectives, and strength of the sponsor covenant. Respondents also highlighted that existing legislation and trustee fiduciary duties make this undesirable or impractical.”
“Mixed views regarding additional surplus flexibilities with an emphasis on appropriate safeguards”
“Some concern around volatility of surplus”
“Concern around take-up of surplus options in the context of trustee fiduciary duties”
“Some concern regarding misuse of scheme funds arising from surplus extraction”
“Mixed views regarding use of surplus to enhance DC scheme benefits.”
“Conclusion to Chapter 2
30. We will reduce the rate of taxation applicable to authorised surplus repayments to sponsoring employers and introduce measures to ensure surplus can be shared with scheme members. We note the need to ensure safeguards including levels at which surplus can be taken and covenant strength, and the possible benefits of a 100% PPF underpin. We will launch a consultation to consider the detail of these measures this winter.”
Extracts from Autumn Statement document:
“4.34 To increase opportunities for defined benefit schemes to invest in productive finance while fully protecting member benefits, the government will consult this winter on how the Pension Protection Fund can act as a consolidator for schemes unattractive to commercial providers and whether changes to rules around when surpluses can be repaid, including new mechanisms to protect members, could incentivise investment by well-funded schemes in assets with higher returns. The authorised surplus repayment charge will also be reduced from 35% to 25% from 6 April 2024.” (page 63 of the full Autumn Statement published by HM Treasury ‘Autumn statement 2023’, 22 November 2022, CP 977)
“5.110 Surplus extraction arrangements for DB pension schemes – DWP will launch a consultation this winter on the appropriate regime under which surpluses can be repaid and enabling 100% PPF coverage for DB schemes that opt to pay a higher levy. The authorised surplus payments charge will be reduced from 35% to 25% from 6 April 2024.” (page 98)
Although the reduction in the tax charge on surplus payments was announced on 22 November 2023, it didn’t feature in the Chancellor’s speech. It is also not in the Autumn Finance Bill, published on 29 November, even though pensions tax fills 100 pages of that document. Instead, it is contained in Chapter 2 of this one: Autumn Statement 2023 — Overview of tax legislation and rates (OOTLAR) - GOV.UK (www.gov.uk)
“2.12 Surplus extraction arrangements for defined benefit pension scheme
As announced at Autumn Statement 2023, the government will introduce secondary legislation to reduce the free-standing tax charge which applies to authorised surplus payments to sponsoring employers of a registered pension scheme from 35% to 25%. This measure will take effect from 6 April 2024.”
There is also no information about whether the reduction will apply to surplus payments from an ongoing scheme, a scheme in winding-up, or both. We will continue to monitor the position.
How we can help
For advice about this or any other pension issue for your business, please contact the team or contact me directly.
