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Pensions News

Budget 2013 Comment

The maximum tax-effective pension has been reduced from €115,000 to €60,000 with effect from 1 January 2014.

  • Employers with defined benefit schemes should start now to consider how the cap will be introduced for higher earners so that the positive impact on Funding Proposals can be incorporated.

  • Unusually, this gives plenty of time for tax planning and for higher earners to explore opportunities to avail of the higher limit.

Members will be able to withdraw up to 30% of the value of their AVCs. This will be a once-off option available for a 3 year period from the passing of the Finance Bill 2013.

  • Withdrawals will be taxed at a minimum of the marginal income tax rate. PRSI and the USC may also apply even though relief from these levies is not available on contributions going into AVCs. Members should be made aware of the option that is coming at an early stage so that investment options can be reviewed but they should also be made aware of the potential tax inefficiency involved.

  • It is unclear how withdrawals will affect the Personal Fund Threshold (PFT) for higher pensions but there may be opportunities for those with PFTs to create some headroom.

  • Companies should consider the design of defined contribution schemes carefully. Members will have more options where their contributions are regarded as AVCs which would not include matched voluntary contributions.

The Pension Levy of 0.6% of pension assets per annum will not be renewed after 2014.

  • This announcement is to be welcomed but treated cautiously. A precedent has been set for taxing pension assets so companies should consider carefully what precedent they set in their schemes for funding the levy.

funding proposal deadline Extended

The deadline for submitting agreed and finalised Funding Proposals has been extended to 30 June 2013. The extension will allow time for a more considered response and a fuller exploration of all of the options available. Please contact us if you would like to discuss the options available.

Pension Balance Sheet Liabilities Set to Hit New Highs

Corporate bond yields are used to derive the discount rate used in company accounts to account for defined benefit pension liabilities. The graph below shows how these yields have fallen over the last few years and in particular in 2012 with the yield falling from 4.6% at 31 December 2011 to 2.8% at 30 November 2012. Discount rates are often higher than the yield on the index reflecting the longer duration of the pension liabilities but the difference between the two rates is indicative of the fall in the discount rate if the same approach is adopted this year as last year.

Graph of Bond Yield

If these low rates persist, there will be a sharp increase in pension liabilities at year end. For example, a 1.5% reduction in the discount rate would add about 30% to the liability of a typical defined benefit scheme. Since the assets in most schemes are up less than 15% in 2012, the discount rate reduction has the potential to cause a sharp increase in the deficit shown on the balance sheet. The lower discount rate will also cause a sharp increase in the profit and loss charge for next year.

Employers should start considering the impact now and reviewing the assumptions used. There may be scope to refine the approach used to determine the discount rate and there may be some implicit margins used by the trustees for funding purposes which should be removed for accounting purposes. If the change in approach is material, your auditors may look to have the impact disclosed so discussions should start early.

New IAS 19 Rules Due to Come into Effect

For those who account for pensions under IAS19, the increase to the profit and loss charge for next year will be further compounded by the new rules which come into effect for financial years beginning on or after 1 January 2013. Under the new rules, the expected return on assets will effectively be reduced to the discount rate.

If you would like to discuss how we can help, please contact Joe Byrne, or request a call back.

Other services that may interest you:

Pensions Restructructing and Plan Reviews

Accounting Disclosures

Risk Management

Employers Covenant Review

Dispute Resolution

Closed DB Schemes - Managing Your Escape Route
Joe Byrne's presentation to the IAPF Trustee Network.
Budget 2013 Comment
Review of changes affecting pensions, and the extension of funding proposal deadlines.
Funding Standard Re-introduced
New deadlines, risk reserve and sovereign annuities.