Implementing the restriction of pensions tax relief

Comments from ACCA to HM Treasury, 2010.

While ACCA is pleased to comment on the above consultation, we must express our disappointment at the government's decision to abandon the first principle of its own code of practice on consultation and restrict representations to the implementation of the policy, and not the policy outcome itself. ACCA has attended the workshops, consulted its members and technical committees and sets out its response to the consultation below, but must emphasise that we consider that any implementation of this policy cannot be a 'best option', simply a 'least bad' one.

ACCA notes the recent release of the Treasury Consultation Document A Tax Framework for Business and questions how the current proposals align with any of the six principles set out in that document. The government's chosen policy will inevitably create complexity and an additional administration burden for all those involved. We acknowledge the stated aim in the consultation document of attempting to ensure fairness, but believe that in the realm of pension benefits this is a concept which is almost impossible to define and harder still to achieve. Simplicity, while far easier to define, will be impossible to achieve if there is any imperative at all to achieve anything even resembling fairness between the radically different issues facing defined benefit (DB) and defined contribution (DC) scheme members.

ACCA is furthermore concerned that any increase in the complexity of administering occupational pension schemes can serve only to further discourage employers from offering such schemes, or to accelerate closure of schemes that already exist. The existence of quality pensions provision is dependent upon support and buy in from senior management, both directly in their role as decision makers and indirectly through their personal participation in occupational pension provision. Tax measures which encourage the most highly remunerated and valuable members of pension schemes to withdraw from those schemes is likely to weaken the employer covenant and weaken the position of schemes in general. This will affect not only the higher paid, but all members of occupational schemes as support for them falls and provision is withdrawn from employees in general.

The direct tax burden of this policy will fall principally upon two groups of people, the owner managers of small businesses and other entrepreneurs who are in a position to pay themselves large salaries, and senior employees of large businesses. In the case of the former, establishing the level (and value) of their pension contributions should in most cases be relatively simple as few will have DB schemes. In the case of the latter however there will be a significant proportion of members who receive both DB and DC benefits. The information will have to be provided by the scheme administrators, imposing a significant secondary administrative burden on them. The mere fact that the administrators are under a legal duty to provide a valuation of the benefits for an individual does not mean that doing so is a simple matter, or one which the administrators are equipped to perform on a regular and wholesale basis, as this policy will require. Regardless of how much the government consults on implementation of this policy, the legislation will inevitably fail the tests of simplicity and fairness, simply because the policy itself is unable to deliver them.

Against this background, ACCA sets out below its detailed responses on selected areas of the consultation document. ACCA considers that the adoption of a two-way ARF is likely to create the fewest examples of unfairness while keeping the burden on scheme providers to the least high level. The ‘scheme pays' option, while superficially attractive, has such serious flaws both in legal and practical terms that in its current form it would be unworkable. ACCA suggests that an option for the relevant employer to pay the tax (subject to a suitable grossing up formula) would be more appropriate, or failing that an extension of the 3 year deferment option. Legislators must bear in mind that for many members of DB schemes this restriction of relief will result in additional tax payments which were not envisaged when the schemes were set up, or when the individuals entered them. The fairness of this is open to question, but not to consultation, so we must look to the simplest solution which does not compound any perceived unfairness.