Guidance

Autumn Statement 2023: a GAD technical bulletin

Published 24 November 2023

The Chancellor of the Exchequer presented his Autumn Statement 2023 to Parliament on 22 November. Described in his speech as an “Autumn Statement for Growth”, the Chancellor introduced measures to “reduce debt, cut taxes and reward work”, as well as setting out plans for reforms to the pensions industry. This bulletin focuses on the pension reforms and a selection of other Autumn Statement measures most closely linked to GAD’s work.

Mansion House pension reforms

The government announced a package of pension measures which represent the next steps of the Chancellor’s Mansion House reforms, announced in July 2023. The reforms are intended to provide better outcomes for savers, drive a more consolidated pensions market and enable pension funds to invest in a diverse portfolio.

HM Treasury (HMT) describe the reforms as meeting 3 golden rules:

• to secure the best possible outcomes for pension savers
• to prioritise a strong and diversified gilt market
• to strengthen the UK’s competitive position as a leading financial centre

The Chancellor and the Secretary of State for Work and Pensions have set out their vision for the pensions market in 2030, writing jointly to the Financial Conduct Authority and the Pensions Regulator. That vision “ensures there are suitable retirement options for savers, supported by a streamlined pension provider market that is continually challenged to deliver value for every member.”

The proposed reforms are wide-ranging, with the potential for impact across the pensions industry, including defined contribution (DC), defined benefit (DB) and collective DC (CDC) schemes. There are several accompanying publications. They include government responses to recent consultations and calls for evidence on topics such as decumulation options, Master Trusts, and pension trustee skills and capability. We focus on three elements of the reforms:

LGPS investment

Following a consultation earlier this year, the government has confirmed that guidance for the Local Government Pension Scheme (LGPS) in England and Wales will be revised to implement a 10% allocation ambition for investments in private equity.

The consultation response says the government is committed to unlocking capital to support growth businesses, while improving returns for pension funds.

It notes that the LGPS is largely well-funded and has a very long-term time horizon, unlike most private sector DB funds (which are typically closed and much more mature). The response states that the LGPS is therefore well-placed to benefit from more illiquid but potentially higher-return investments.

Setting this 10% allocation ambition does not mandate investment. Administering authorities would be under the same requirement as currently to act in the interests of members under their fiduciary duty. Investment in the UK is “particularly welcomed” by the government, but it is not proposed to restrict this ambition to investments in private equity in the UK.

The government is establishing a March 2025 deadline for the accelerated consolidation of LGPS assets into pools. To realise the benefits of scale, the government is also setting a direction towards having fewer pools, each with at least £50 billion of assets under management. In his speech, the Chancellor said that all LGPS funds will be invested in pools of £200 billion or more by 2040. GAD provided modelling to HMT on the future size of the LGPS. The scheme’s assets are projected to potentially grow to around £500 billion by 2030 and £950 billion by 2040.

Further details of these measures and other proposals relating to LGPS investments are set out in the government’s response to its LGPS (England and Wales): Next steps on investments consultation.

DB schemes and the Pension Protection Fund

Several proposals were announced around DB pension schemes. The government stated that further consultation will take place this winter, including on:

• how the Pension Protection Fund (PPF) can act as a public sector consolidator for DB pension schemes which are unattractive to commercial providers
• the appropriate regime under which surpluses can be repaid
• the viability of enabling 100% PPF coverage for DB schemes that opt to pay a higher levy

The proposals are intended to increase opportunities for DB schemes to invest in productive finance, while fully protecting member benefits.

In his speech, the Chancellor described “opening the PPF as an investment vehicle for smaller DB pension schemes”. The government stated that it believes there is a place in the DB market for a limited public consolidator, on an opt-in basis. It feels the PPF has the necessary skills and experience to run this consolidator. The government says it will work with the pensions industry to establish a public sector consolidator by 2026.

The government is also considering whether changes to rules around when surpluses can be repaid could incentivise investment by well-funded schemes in assets with higher returns. The authorised surplus repayment charge will also be reduced from 35% to 25% from 6 April 2024.

The PPF currently pays some of its members lower benefits than they would have received from their original pension scheme had their employer not become insolvent. This summer’s ‘Options for Defined Benefit schemes’ call for evidence asked whether having greater PPF guarantees of benefits would result in greater investment in productive finance.

The government’s response indicates that mixed views were expressed, with some support for opt-in higher benefit guarantees but some concerns raised. A new consultation will consider the viability of a 100% PPF underpin.

Further details of these measures and other proposals relating to DB schemes are set out in the government’s response to its call for evidence.

‘Pot for life’

A new call for evidence considers the long-term direction of workplace pension saving. This explores whether a lifetime provider model would improve outcomes for savers, how the CDC market can grow, and whether there are synergies between the two. This is the so-called ‘pot for life’ model, giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot, if they choose.

This document also sets out feedback received on proposals to end the proliferation of small pension pots held by deferred members. The government’s intended direction is towards a DC market with a smaller number of schemes, a subset of which act as authorised default consolidators of eligible deferred small pots.

National Insurance Contributions

To incentivise work, the government announced cuts to the main rates of National Insurance contributions (NICs) for employees and people who are self-employed.

The main Class 1 rate for employees will be reduced from 12% to 10%, with effect from 6 January 2024. This rate is currently payable on earnings between £12,584 and £50,284 a year. Earnings over that amount are subject to a lower Class 1 rate of 2%, which will remain unchanged.

NICs for the self-employed are also being reformed from 6 April 2024, effectively abolishing Class 2 contributions and reducing Class 4 contributions from 9% to 8%. An HMT factsheet provides more information on changes to NICs.

The Government Actuary reports to Parliament annually on the financial implications of changes to National Insurance contribution and benefit rates. The next such report, expected in early 2024, will include the impact of the announcements in Autumn Statement.

Lifetime Allowance

The Spring Budget 2023 announced that the Lifetime Allowance (LTA) would be abolished from April 2024, following the removal of LTA charges from April 2023.

Autumn Statement 2023 confirms that the government will legislate in this autumn’s Finance Bill to remove the LTA with effect from 6 April 2024. This measure will clarify aspects such as the taxation of lump sums and lump sum death benefits, the application of protections, transitional arrangements, and reporting requirements.

Uprating of benefits

In April 2024, the government will increase working-age benefits in line with inflation, as measured by September CPI, which was 6.7% this year.

The government has confirmed the Triple Lock will be maintained in April 2024. The Triple Lock increases the basic State Pension and new State Pension by the highest of earnings growth, price inflation and 2.5% a year. This will result in an 8.5% increase in April 2024, measured by the usual earnings metric of annual earnings growth in May to July.

Contingent Liabilities

The Contingent Liability Central Capability (CLCC) has published its Annual Report on the UK Government’s Contingent Liabilities. A key area of fiscal risk comes from uncertain obligations that the government enters into, such as insurance indemnities and financial guarantees - known as contingent liabilities. This is the first time the government has collected new data from departments to help assess the risks from existing contingent liabilities.

The CLCC is the government’s centre of excellence for the management of contingent liabilities. It was established within UK Government Investments, in partnership with GAD, in 2021. GAD provides secondees and other support to the CLCC.

The report aims to identify the scale of contingent liability risk held by government and categorise these risks. This helps to better understand the overall composition of the portfolio. The report also aims to determine whether the government charges adequately for the risk taken on and to consider how to improve value for money across the portfolio. 

PSPS valuations

The Autumn Statement confirms that the Public Service Pension Schemes (PSPS) are in the process of finalising outcomes of the 2020 valuations. These valuations will determine employer contribution rates in those schemes from April 2024 onwards. The government has committed to providing funding for the increased cost of employer contributions from April 2024 for centrally funded employers.

These valuations are based on the revised SCAPE discount rate of 1.7% a year above the annual rate of the Consumer Prices Index (CPI) of inflation. This rate was previously confirmed in March 2023 – see our Technical Bulletin for more information about the SCAPE rate. The Office for Budget Responsibility published its November 2023 Economic and Fiscal Outlook alongside the Autumn Statement. This report includes an explanation of the fiscal implications of changes to the SCAPE rate (Box 4.4).

Conclusion

The Autumn Statement 2023 delivered a wide range of announcements and plenty of accompanying documentation. While we hope the topics covered in this bulletin are of interest, they do not represent a comprehensive summary of the government’s proposals. Further information is available on HMT’s Autumn Statement 2023 website. Please speak to your GAD adviser if you have any questions about how the Autumn Statement might impact your work.