From removing the limit on lifetime pension savings to potential consolidation of pools, both Ian Colvin and Iain Campbell from Hymans Robertson pull out their Local Government Pension Scheme highlights from last week’s Budget.
Before the Budget, there was much speculation about an increase in the amount of pension growth that individuals can enjoy without facing a tax charge.
Few, however, expected chancellor Jeremy Hunt to be quite so radical in completely removing the limit on lifetime pension savings.
The change intends to encourage older, higher-paid workers – particularly doctors – to stay in the workforce instead of retiring early to avoid large tax bills.
While the measure will certainly make a small number of people better off, it’s not yet clear how it’ll work in practice – or how well it’ll achieve the stated aim.
Since 2006, there have been limits on the amount of tax-privileged savings an individual can make over their lifetime, known as the lifetime allowance (LTA) and over a year, the annual allowance (AA).
These limits have fluctuated widely but had settled at £1.073m for the LTA and £40,000 for the AA – although some pension scheme members could have different limits, depending on their circumstances.
The LTA has only ever affected a small number of Local Government Pension Scheme (LGPS) members. But for those who are close to, or above, the old limit of £1.073m, this change could save them a significant amount.
The reduction and freezing of the AA over the years has led to more LGPS members – albeit only a small proportion – breaching its limit.
But this change to the AA will cause fewer members each year to exceed the new limit, meaning the tax will affect either the highest earners within the scheme or those who experience large pay rises during the year.
However, shadow chancellor Rachel Reeves has already pledged to reverse the LTA change if Labour wins the next election.
Given Labour’s current lead in the polls, does this mean high-earning individuals will maximise the amount of pension savings they make in the next tax year, before retiring with untaxed benefits just in time for the next election?
Consolidation of pools
The Budget also provided some unexpectedly significant indications about the government’s plans for the future of the LGPS, particularly in terms of pooling. On this topic, the Budget provided two updates.
The first is a potential requirement for funds to pool all “listed” assets by March 2025. As the government hadn’t previously set strict deadlines, this is a step up in expectations.
The immediate question is: what would be classed as “listed” assets? Does this simply mean traditional public equities and bonds? Or will the definition be broader, including assets that are sometimes technically classed as listed, such as some property investments?
Another key question concerns passive funds. At the outset of pooling, many passive managers significantly cut their fees to provide LGPS-wide fee rates, given directly to the individual funds. This removed the need for funds to pool their assets to negotiate lower fee deals with their passive managers.
We now find ourselves in a position where transferring passive funds into a pool would increase management fees, as funds would then incur the pool’s fee on top. This issue requires careful thought to prevent pooling from actually increasing fund costs.
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The second update is a possible move to a smaller number of larger pools. A large amount is still unknown about the government’s expectations. One key issue is how this will happen.
In the first round of pooling, funds were instructed to form eight pools of at least £25bn in size and to work together to find their own solutions. Now that the government has seen a variety of operating models and results, will it be more prescriptive in how this consolidation of the pools takes place?
Other important considerations are the timescales for completion and cost savings, given the significant expenditure the first round of pooling required.
Investing in illiquid assets and levelling up
Another update in the Budget was the government’s potential requirement for funds to invest in illiquid assets like venture and growth capital.
This was first mentioned specifically in the Edinburgh Reforms – it’s presumably a follow-on from the “local investment” stipulation in levelling up secretary Michael Gove’s levelling-up white paper. Here, the ambition is for funds to invest money in UK projects that will help the UK’s economy.
Many LGPS funds already invest in these asset classes, but careful consideration must be given to how funds could invest while still expecting to earn their required rate of return, for an acceptable level of risk. This balancing of fiduciary duty and support for the UK economy will be a challenge.
However, key questions do remain about the types of investment that would meet the criteria. For example: will there be a list of particular characteristics, or a need to demonstrate the benefit to the UK economy? And will any new requirement include investments that funds have already made?
Both Ian Colvin and Iain Campbell work at Hymans Robertson, where Colvin is head of LGPS benefit consulting and Campbell is a senior investment consultant.
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