Clause 48 - Employer asset-backed contributions etc
Mark Hoban (Financial Secretary, HM Treasury; Fareham, Conservative)
It is a pleasure to serve under your chairmanship, Mr Amess. Clause 48, which introduces schedule 13, makes changes to the tax rule that will apply to asset-backed pension contributions to preserve their flexibility while preventing excessive tax relief. I will give the Committee some background. Employer asset-backed pension contributions allow an employer to put in place arrangements to reduce the funding deficit of the registered pension schemes. They also provide employers with flexibility around making pension contributions against sometimes volatile deficit levels without affecting their cash flows. At the same time, the arrangements give pension schemes the security required to meet their obligations to members.
The Government recognise the commercial benefits of the arrangements and want to ensure that they can be used as a way of funding pension schemes. However, some of the arrangements can give rise to unintended excess tax relief, as a result of the ways in which they are structured.
In the Budget 2011, we announced a consultation on changing the tax rules that apply to asset-backed pension contributions. The arrangements involve an employer committing to make a series of payments to the pension scheme by transferring an income-producing asset to the scheme. The arrangement will provide security to the pension scheme, because the asset will be passed to the scheme if the employer cannot make the payments during the arrangement period. On completion of the arrangement, the asset will be returned to the employer.
Following the consultation, we announced changes on 29 November 2011, with effect from that date, to prevent forestalling risks. Further changes were announced in February of this year to preserve the original policy objective following comments received on the draft legislation. Further minor changes, effective from 23 March 2011, were announced at Budget 2012.
The changes made by the clause and schedule will ensure that up-front tax relief would be given to asset-backed pension contribution arrangements only where they meet certain conditions. The conditions will ensure that at the start of the arrangement, the pension contribution promised by the employer is guaranteed to be paid by the end of the arrangement. Where that is not the case, the provisions will ensure that up-front relief is not given. The changes will save the Exchequer nearly £2.5 billion between now and 2016-17 by preventing excessive tax relief arising to those employers who made use of particular types of asset-backed pension contributions. The majority of employers are not affected by the measure.
Schedule 13 also includes minor changes to the legislation on structured finance arrangements. This will make it easier for an asset-backed contribution arrangement to qualify for up-front relief, while reducing avoidance risks in the context of the structured finance arrangement legislation.
I will turn briefly to the amendments. It has come to HMRC’s attention that some pre-existing arrangements, where the contribution was paid before 22 February 2012, may be affected in unintended ways by the transitional provisions in parts 2 and 4 of the schedule. The relieving amendments remove the unintended consequences to ensure that the relief given to the employer under such an arrangement accurately reflects, but does not exceed, payments made to the registered pension scheme. The amendments also clarify the fact that payments or determinations made in the first working day following the end of the 12-month period will not prevent any arrangement from gaining up-front relief where contributions are paid on or after 22 February 2012, provided that the arrangement meets all the other qualifying conditions.
The reforms will help to protect the Exchequer against significant tax risks while at the same time providing employers with the flexibility to continue to use asset-backed pension contributions.
Rachel Reeves (Leeds West, Labour)
Clause 48 brings into effect, as the Minister said, schedule 10, limiting the amounts on which tax relief will be given to an employer in respect of contributions paid under an asset-backed pension contribution, or an ABC. The intention of the measure is to ensure that the tax relief accurately reflects, but does not exceed, the total amount of payments made to the registered pension scheme. The codification of this area is to be welcomed.
The asset-backed pension contribution is a structure in which a company transfers non-cash assets to a separate entity to provide an income stream to the pension scheme. At the end of an agreed period, the asset may pass to the company if the scheme is in surplus, or to the pension scheme if the scheme is in deficit. This can help to increase the security against the scheme and makes commercial sense at different times. There has been some uncertainty about this area in the tax regime, given the variety of deals that are done and the range of commercial purposes and benefits that they represent. It is right that the amount of tax relief given to employers using ABC arrangements reflects accurately the total amount of payments that the employer makes to the pension scheme, directly or through the ABC measure.
I understand that schedule 10 makes amendments to the structured finance arrangement rules to include ABC schemes within their scope. Has the Minister given consideration to what the effect would be of applying a tax code to ABCs, rather than amending existing arrangements? How many ABCs are set up each year? Have the new tax arrangements had an effect on that since the draft legislation was released? Does the Minister expect the clause to affect the number set up in future years?
John Mann (Bassetlaw, Labour)
I have a brief question for the Minister, because last year the Government managed to mess things up totally on draw-down pensions. The change in gilt values currently costs 300,000 pensioners 60% of their pension. The Government have not yet admitted that, nor have they addressed the technical details to do something about it. That is 300,000 pensioners, quite a few of whom do not know about it because the Government changed the frequency of the actuarial valuation to every three years. So pensioners discover the problem only in the three-year review. I do not know whether the Minister intends to introduce the technical changes needed to address that problem, but are there any theoretical nasties that might occur with this proposal as a result of changes in the economic environment?
Mark Hoban (Financial Secretary, HM Treasury; Fareham, Conservative)
I will first address the shadow Chief Secretary’s question. The measure should not affect the number of schemes that are set up. Clause 48 and schedule 13 seek to protect revenue, and the only schemes that will be affected are those that seek to claim more tax relief than is warranted. I do not think any of us would want schemes to be designed to claim more tax relief than is due to a company, and I do not believe that the measure has that effect.
The arrangements are important, and we want pension schemes to remain open where possible. Employers may contribute, for example, by identifying an income stream from an asset or by transferring an asset to the scheme for a limited period, which helps the schemes stay open. It is in the interest of employers and employees that we do what we can to help while ensuring that the Exchequer does not lose out through excessive tax relief.
The hon. Member for Bassetlaw asked whether there were any nasties that might affect pensioners, and the answer is no. The rules are clearly defined and their terms are carefully restricted. We do not expect there to be any spill-over effect on pensioners. I will write to him separately on draw-down. He should recognise that there is flexibility for pensioners and improved flexibility for those aged over 75. The amount that pensions can draw down depends on not only gilt yields but how much has been drawn down in the past and, above all, on the investment performance of the funds in which the pensions are invested.