Buried deep in the text of the UK's National Budget was a legislative change resulting from a simplification of the pension system that had the industry in a tizzy.
The Government’s announcement that it planned to end contracting-out – where a company can offer benefits in place of the State Second Pension, and receive a break in National Insurance Contributions in return – led to further calls of the end of defined benefit.
The end of contracting-out appeared on page 40 of the 104-page budget report under the bigger news that, in its quest to simplify the state pension system, the UK plans to move to a single tier pension. This would do away with the State Second Pension. Chancellor George Osborne also proposed merging national insurance and income tax contributions.
The changes also lead to the loss of a 3.7% tax break for companies with contracted-out employees.
PwC pension partner Marc Hommel’s take on contracting out was typical of the views that flooded my inbox following the budget announcement. He said: “Contracting-out has, since it was introduced in 1978, created nothing but confusion for pension plan members. It has mired pensions in a continued mystique, and made communication and administration horrendously complex.
However, it has provided a financial incentive for a declining number of employers to perpetuate defined benefits provision. The end of this incentive will make up the minds of those few remaining employers to accelerate defined benefit closures.”
Cries over the death of DB have been heard for years. But in the past, the industry tended to point a finger at the increasing complexity of the pensions industry for forcing companies to throw in the towel – complexity in taxes, regulation and financial markets.
This could be the rare occasion, however, when the industry is pointing to a death by simplicity.
Click here to read our analysis of the impact changes to contracting-out will have on pensions.
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