Will “DC deficits” become a thing of the past?

News of HMRC’s “change of position” with regards the “net-pay- anomaly” is welcome, and long overdue. It came in the form of a letter sent in response to a request from respected journalist Jo Cumbo of the FT.

It has been greeted with little enthusiasm by the majority of the pensions industry. This in sharp contrast to NOW pensions, who got the momentum together for the joint letter.

Commenting on reports in today’s Financial Times that HM Treasury will tackle any differences in how pensions tax relief is provided, Adrian Boulding Director of Policy at NOW: Pensions said: “We’re pleased to see the government making a firm commitment to resolving the anomaly in net pay schemes. This is an important issue which has been swept under the carpet for too long. We look forward to working with HM Treasury and HMRC to make sure all savers are treated equally.”

Here is the only public comment I can find from a UK pension consultant.

It is very good that Hymans published that research back in April, but it only tells half the story, the vast majority who are overpaying on their workplace pension contributions by up to 25% are not in multi-employer master trusts, but in single employer sponsored occupational schemes.

The deficits between what a low-earner enrolled into an employer’s occupational pension scheme is every bit as real – in terms of outcome – as the deficits of which so much is made, in our DB plans. Both will result in a material loss for members. Deficits are very real, very numerous and they reduce DC cash balances just as the PPF reduces DB pensions.

Since the low paid can now but auto-enrolled into DB schemes (including Government schemes), it is likely that a significant proportion of those losing out because of the impasse, are consulted on by Hymans Robertson, WTW, Mercer, Aon and my own First Actuarial. For DB members, it is a question of over-payment of contributions not the reduction of benefits, but the impact amounts to the same thing. The low-paid are being ripped off and the pensions industry hasn’t seemed to be giving a monkeys.

This is why this is an industry problem and not just one particular to master-trusts and why the PLSA put its name to the letter which has prompted this change of position.

News of this “change of position” came on the same day we heard that the Competition and Markets Authority are to launch a Market Study into the role of auditors in occupational pension schemes. Professional Pensions reported yesterday

Defective” company audits could mean millions of savers in pensions funds are “losing out”, says the Competition and Markets Authority (CMA) as it launches a probe of the audit sector.

I hope that the report will include the issues highlighted here and elsewhere on the failures of auditors to report on DC Deficits.

Payroll welcomes the news.

I was (and will be again today), speaking at the CIPP annual conference in Birmingham. The reaction to the news that everyone contributing to a workplace pension would be given the promised incentive, was greeted with enthusiasm. This from people who have day to day contact with the people affected, people who understand the risk to their employers (or for bureaux- customers) of being a party to a scandalous situation.

Speaking to the CIPP’s Helen Hargreaves (a co-signatory on the letter) , the reported change in position has clearly been seen as a win for common sense and natural justice.

We now need to ensure that the implementation of any change is fair to the low-paid. This is what I hope the signatories to the letter will urge the Treasury to do.

With understandable reservation…

The note of caution sounded by some related to the possibility that the change of position was part of some wider conspiracy against low-earners. This from one person who commented to me by email

Let’s hope their solution isn’t to stop tax relief for non taxpayers. Wouldn’t put this past HMRC.

This view, that HMRC are preparing to dumb down pensions generally , focusses for many, on the possibility of the Chancellor announcing in the budget a move to flat rate tax relief on personal contributions.

Though nothing is impossible, it is difficult to see how this would work. Most employers now have the capacity to disguise employee contributions as employer contributions through the use of salary sacrifice. Working out what has been sacrificed and extracting cash from the imputed amount will require a “scheme pays” type mechanism.

For such a system to be introduced will require extensive and expensive changes in processes at both HMRC and from pension and payroll providers. I do not think that such a disruptive move would carry political support from a business friendly conservative party, nor social support from a country supposedly engaged in helping out those “just getting by”.

Are pension experts embarrassed?

So I am minded to ignore the Jeremiahs and take the silence of most pension experts as the embarrassment of knowing they have done little or nothing about this problem for the many years that it has been known.

I suspect that the silence among consultants on the issue has been because they not only advise on the design and administration of the net-pay schemes that are at the heart of the problem, but they administer them too.

If the solution to the problem is “retrospective”, then the bill for restitution will be a disputed bill. Will it fall to the administrators, the advisors or rest with the trustees?  In a DC trust there is no contingency for restitution, the costs of working out fair shares and allocating monies in line with the losses incurred would be substantial.

It is more likely that the revenue will draw a line in the sand and expect any new practice to be forward looking. This will still put a great deal of strain on the software designers on whose record keeping systems most of the net-pay schemes sit, the administrators who will need to change processes, payroll who will have a job to do ensuring that any tax anomalies arising from the changes are recorded and of course employers and trustees who will have to explain all this to bemused low-earners.

Is this just too awkward?

It’s all very awkward isn’t it? It’s not the kind of dirty linen that the occupational pensions industry wants to be talked about, especially as this not a problem that impacts contract-based plans run by insurers or master trusts operating on relief at source (NEST and People’s Pension for instance).

It’s a problem that has run on too long and that needed to be addressed. The twin spurs pricking the sides of the Treasury’s intent are undoubtedly the problems surrounding Scottish Income Tax and the imminence of the Budget.

My personal guess is that the “Net-Pay- Anomaly” offers an embattled Chancellor an opportunity to give to the poor some of what he’s taking from the rich (by way of reduction of pension allowances).

If this is what Phillip Hammond does, I will not be against it. The pension taxation system is so biased against low-earners in favour of those with large pensions and pension pots, that any form of redistribution is to be welcomed.

Phillip Hammond does not need to feel awkward about being seen to solve the net-pay problem, but I’ll be making him feel very awkward indeed, if after the letter  sent to Jo Cumbo at the Financial Times, the Budget remains silent on this issue.


Better late than never

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, annuity, auto-enrolment, pension playpen, pensions and tagged , , , , , , . Bookmark the permalink.

2 Responses to Will “DC deficits” become a thing of the past?

  1. Adrian Boulding says:

    Well said Henry! NOW: Pensions welcomed the Treasury change of heart with a press release issued yesterday. We want to help them take it forward.


  2. henry tapper says:

    Now included

Leave a Reply