Mini-Budget: Govt to accelerate pension charge cap reforms

Chancellor, Kwasi Kwarteng, has confirmed plans to "accelerate" reforms to the pensions charge cap in his mini-Budget, in an effort to "unlock" pension investments into UK assets and high-growth businesses.

The measures were announced as part of the emergency ‘mini-Budget’ delivered to the House of Commons today (23 September), alongside a number of tax cuts and the reversal of the National Insurance rise.

The change aims to give defined contribution (DC) pension schemes the "clarity and flexibility" to increase investment into UK businesses and productive assets, and to deliver higher returns for savers.

Kwarteng stated: “To drive growth we need new sources of capital investment, to that end I can announce that we will accelerate reforms to the pension charge cap so that it will no longer apply to well-designed performance fees.

"This will unlock pension fund investments into UK assets and innovate high growth businesses.

"It will benefit savers and increase growth, and we will provide up to £500m to support new innovative funds and attract billions of additional pounds into UK science and technology scale ups.”

According to The Growth Plan, the government plans to introduce a new Long-Term Investment for Technology & Science (LIFTS) competition, which will provide up to £500m to support new funds designed to catalyse investment from pensions schemes and other investors into the UK’s science and technology businesses.

The government previously confirmed that it would proceed with proposals to exclude performance fees from the 0.75 per cent charge cap on defined contribution (DC) default arrangements, despite industry concerns that this could risk undermining member protections.

Commenting in response to the Chancellor's announcement, B&CE, the provider of The People's Pension, director of policy, Phil Brown, also stressed that reforms to the charge cap "do not alter the fact that trustees control how pension schemes invest".

"Exempting performance fees from the cap shifts responsibility for getting value from investments back to trustees," he continued.

“Furthermore, the commercial reality is that employers buying pensions for their staff expect workplace pension charges to be well below the charge cap.

"That is a much bigger barrier to schemes increasing charges to pay for more sophisticated investment approaches than any piece of regulation.”

Pinsent Masons pensions partner, Carolyn Saunders, also explained that the changes, while likely to help some schemes, are unlikely to be a "silver bullet", agreeing that there are many other factors that can discourage schemes from investing in this way.

"However, the Chancellor’s reference to this being available in the case of ‘well-designed performance fees’ is perhaps intended to acknowledge some of the other factors that can discourage schemes and which have been raised by the industry," she continued.

"The detail of what is intended here is what will really hold the key to whether this move unlocks investment in the way that the government hopes.”

This was echoed by Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, who stressed that the "definition of 'well-designed performance fees' will be very important".

Hymans Robertson head of DC investment, Callum Stewart, also argued that while investment in illiquid investments can make a "big difference to society" and improve long-term outcomes, comments around the cap are "merely covering up the worries of many".

"Within the industry, we are afraid that pensions savings will be the first thing to be cut for many, leading to an ever increasing number of pensioners and future pensioners heading into pensioner poverty," he explained.

"Tinkering around the edges won't address these big issues. We would advocate a material overhaul of the auto-enrolment legislation, with much more done to encourage individuals to forward plan and invest in their pensions and enable them to do so when their position improves.

"We also need to move the dial on investment approaches, with more focus on embracing potentially significant opportunities to improve outcomes, rather than tinkering with the minutiae in the regulations.”

Also in the mini-Budget, the Chancellor announced that the government will be bringing forward the 1 percentage point cut to the basic rate of income tax to April 2023, 12 months earlier than planned.

The cuts are being accelerated in an effort to ensure workers, savers and pensioners can keep more of their income, with an average gain of £170 in 2023-2024.

However, The Growth Plan confirmed that there will be a one-year transitional period for Relief at Source pension schemes to allow them to continue to claim tax relief at 20 per cent.

However, Aegon pensions director, Steven Cameron said that this could mark a "slight sting in the tail" regarding pension contributions, as individuals would need to pay in £81 from take-home pay to have £100 invested in their pension, compared to the current £80.

Cameron also explained that while the changes will allow "millions" to keep more of what they earn, unfreezing the income tax thresholds could be a much more powerful lever.

“While this is a welcome boost to take-home pay, for many it will fail to compensate for frozen income tax thresholds," he continued. "Unfreezing these would be a much more powerful lever to support lower and modest earning households.

"For anyone earning under £37,670, increasing the basic rate threshold by 10 per cent, around the current rate of inflation, would offer a greater income tax saving than cutting the rate of income tax from 20 per cent to 19 per cent."

However, Canada Life technical director, Andrew Tully, suggested that the reduction in income tax could present a "pension planning opportunity for those who can afford to make pension contributions in the current tax year".

"Additional rate taxpayers will get 45 per cent relief, whereas next year contributions will only receive 40 per cent relief," he explained. "Similarly, basic rate taxpayers can obtain 20 per cent relief on contributions this year, which will fall to 19 per cent next year.”

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