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The Actuary The magazine of the Institute & Faculty of Actuaries

Treasury consults on asset-backed contribution tax rules

The government has identified two broad options for changing the tax rules governing employer asset-backed contributions to defined benefit schemes.

The measures, outlined in a consultation document issued by HMRC and HM Treasury yesterday, seek to clarify the tax rules governing asset-backed pension contributions made by employers to DB schemes in order to limit the unintended tax relief that can arise from the ways some contributions are structured.

This comes following government concern that some asset-backed funding arrangements give rise to tax relief that is greater than the fair value of plan assets received by pension schemes.

The first option proposes providing relief only when cash is received by schemes, which would remove automatic upfront tax relief for asset-backed contributions. Employer tax relief would be given only when cash actually changes hands between the employer and the pension scheme, or when the scheme acquires full title to an asset that can readily be converted into cash, for example a traded security.

The second option involves aligning tax rules with accounting rules, which would involve amending existing tax rules to ensure that the tax treatment of the arrangements as a whole accurately reflects the economic substance of the transaction. This means that the tax treatment of the arrangements would generally follow the relevant accounting rules over the period of the arrangements.

Any changes introduced will not apply to transactions that have already taken place, the document said.

Treasury said leaving the existing tax rules unchanged is not an option because of the cost of unintended tax relief.

The consultation document follows Chancellor George Osborne’s announcement in March’s Budget that the government will consult on changing tax rules to cap the amount of tax relief available to employers who use assets to fund their DB schemes.

Deloitte Pensions Advisory partner Gavin Bullock said: "The government’s message is consistent with that of The Pension Regulator - that companies and trustees need to work together to ensure their asset-backed structures demonstrably improve their pension scheme’s position, both in terms of funding and security for all members.

"The current consultation is extremely timely, given the increasing market appetite for this type of structure."

Mercer partner Matthew Demwell said the consultation makes sense since it may be possible to devise arrangements that game the current system, and their status needs to be reviewed to avoid the whole market being brought into disrepute.

He added: "We would urge the Treasury to ensure that the outcome does not restrict this important and legitimate method of funding, however. If it does, it could damage both employers’ cash flow and pension schemes’ funding levels."

The consultation, which closes on 16 August can be found here

[Source: Professional Pensions”