In the March 2011 Budget the Government announced that it would consult on the tax treatment of Employer Asset Backed Pension Contributions (ABCs) as a way of funding pension scheme deficits. HM Treasury and HM Revenue and Customs published a consultation document in May seeking views on two options for reform.

Responding to the consultation, the NAPF said that any revision to the tax treatment for ABCs needed to be viewed within the Government’s wider commitment to reinvigorate occupational pensions. The NAPF proposed that while any updated tax regime for employer ABCs should be sufficiently robust to prevent abuse of excessive tax relief by plan sponsors, it should not be so prescriptive to prevent the use of employer ABCs as a legitimate part of a pension scheme’s funding strategy, particularly deficit repair.

The key points from the NAPF’s response:

• The NAPF welcomes the opportunity to respond to the review of the tax framework for Employer ABC arrangements.
• Recent years have seen significant changes in the pensions landscape with employers increasingly withdrawing from defined benefit pension provision. The increasing costs of running a DB scheme have meant that many DB schemes have been in deficit for the last two actuarial valuations.
• The NAPF welcomes the Government’s commitment to reinvigorate occupational pension provision as set out in the coalition agreement. And it is against this commitment that proposals for amending the employer ABC regime should be evaluated. Given the financial pressures on employers and schemes, the Government needs to be careful not to stifle innovation regarding how employers use different approaches to fund pension scheme deficits.
• The NAPF proposes that any updated tax regime for employer ABCs should be sufficiently robust to prevent abuse of excessive tax relief by plan sponsors, but not so prescriptive to prevent the use of employer ABCs as part of a pension scheme’s funding strategy, particularly deficit repair. The flexibility provided by employer ABCs allows scheme sponsors to better manage the cost of deficit contribution payments by spreading additional contributions across a period of time while receiving tax relief within limits set by HMRC. The Government must not undermine this efficient process by introducing unnecessarily burdensome regulation.
• From the options proposed in the consultation, the NAPF believes that option B – a closer alignment between the accounting and tax arrangements for employer pension deficit contributions – is the best fit with the accounting treatment of existing employer ABC arrangements already in place. A one size fits all approach to the use of employer ABCs could stifle design innovation and reduce the use of these arrangements by scheme sponsors. Option B permits greater flexibility and recognises the diversity of current arrangements for pension scheme deficit funding. Option B is considered the best choice in policy terms and on practical grounds and should form the core of any new regulatory framework for employer ABC arrangements.

Tell us what you think

Do you have views on the HMT/HMRC consultation? Contact David McCourt with your views.

ABC Timeline

March 2011 – HMT announced in the Budget that the Government would consult on the tax treatment of ABCs, .

May 2011 – HMT/HMRC issue a joint consultation on the tax treatment of ABCs, here.

August 2011 – NAPF responds to the consultation, here.