What’s New bulletin April

 

UK Government plans costs orders to enforce family dispute mediation in England and Wales

(AF1, JO2, RO3) 

The Ministry of Justice (MoJ) has launched a consultation on measures to help couples in England and Wales resolve private family disputes earlier through mediation. 

The issue 

More parents than ever before are resorting to the courts to resolve custody arrangements for children. According to the MoJ, 56,754 applications were made for child arrangements orders in 2021 compared with 52,944 a decade earlier. In the same period, 48,666 applications were made for financial orders compared to 46,348 in 2011. 

Even though the number of contested financial applications has fallen significantly, the number of sitting days in the private law family courts increased by 52% in the six years to 2021. 

The time required to complete a private law children's case rose from 26 to 40 weeks. These increases are largely due to the impact of the COVID-19 pandemic. The latest statistics available, from September 2022, suggest that it currently takes an average of 45 weeks to complete a case. 

The solution 

In late 2021, the MoJ conducted a call for evidence on dispute resolution in the England and Wales family courts, with a view to making mediation compulsory. In the meantime, it has been encouraging families to use mediation through the mediation voucher scheme launched in March 2021, which gives eligible parents or carers a £500 voucher towards the cost of mediation. Nearly 13,500 families have used it to help pay for mediation and funding was increased in 2021 to provide for an extra 10,200 families. 

However, the MoJ has now announced it intends to make mediation compulsory before an application can be made to court for most private law children’s cases and contested financial remedy cases. These would be those cases for which a mediation information and assessment meeting is currently a requirement. For appropriate cases, the MoJ intends to fully fund compulsory mediation. For financial remedy cases, it is asking for views on an appropriate funding solution 'in the best interests of the parties themselves and the taxpayer'. The consultation paper sets out some funding proposals for compulsory mediation in both children and financial remedy cases, as well as the proposed exemptions to the requirement to mediate. It also examines how the process could work in practice.

The proposed system of compulsory mediation will be 'effectively enforced and supported' by the family courts, says the consultation document. Those who do not make a reasonable attempt to resolve the dispute themselves through mediation will be held to account by paying costs orders. 'The court should not be used as a tool for those looking to prolong or escalate conflict', says the paper. 

Comment 

The Government has taken various steps to cope with the increase in judges' workloads, such as technology to allow hearings to be conducted remotely, an increase in judges working in family courts and more efficient digital systems for financial remedy cases. However, it says the lengthening delays ‘have the potential to be harmful’ to both adults and children. Although some cases will continue to need effective access to the family courts, the MoJ believes a balance can be found that supports families to resolve child arrangements and financial matters out of court. 

The consultation closes on 15 June 2023.

 

High Income Child Benefit Charge new data

(AF1, RO3) 

HMRC have released new data on the High Income Child Benefit Charge. 

The High Income Child Benefit Charge (HICBC), introduced in January 2013, remains a prime example of how not to design and operate a tax. As a reminder, the aim of HICBC is to make any Child Benefit recipient repay some or all of their Child Benefit back (as tax) if they or their partner has an individual adjusted net income exceeding £50,000 per year. The repayment is at the rate of 1% of total benefit paid for each £100 of income above the threshold, up to £60,000, at which point the tax charge matches the total benefit. Among the HICBC’s many flaws are: 

• The £50,000 threshold has been unchanged since its introduction. At the time the higher rate tax threshold was £42,475, so arguably there was initially an element of ‘high income’ to the HICBC. Now, a basic rate taxpayer is just within its ambit. Had indexation applied, the HICBC threshold would now be around £65,000. 

• The effective rate of the HICBC tax rises as child benefit rates increase. For example, for a family with two children the effective tax rate was 18.85% in 2022/23 and is now 20.75% in 2023/24. 

• A couple with joint income of £100,000 split equally would suffer no HICBC, while one in which there was a sole earner with income of £60,000 would pay the maximum HICBC. 

• There is no consistency with other elements of child tax and benefit policy. For example, the free childcare provisions, which were given a boost in March’s Budget, have a cliff edge income threshold of £100,000 per individual. Stranger still, there are situations where Universal Credit is payable even when all Child Benefit entitlement has been removed by the HICBC.

The latest statistics from HMRC on Child Benefit highlight the distortions that HICBC has created: 

• 7.70 million families claiming Child Benefit, but only 7.01 million families are in receipt of Child Benefit payments. The missing 690,000 are families where benefit is claimed to secure entitlement NIC credits, but no Child Benefit is paid because HICBC would nullify it. Lack of awareness of the need to claim Child Benefit, thereby triggering automatic NIC credits, is another system flaw. 

• In 2020/21, the latest year for which figures are available, 355,000 people paid £405m in HICBC, figures which HMRC estimate need a 4% uplift ‘in response to late tax returns or compliance activity’. If we adjust for this, the pattern of HICBC payers and their payments looks like this: 

• The HMRC data used in the above graph is only part of the story. In practice it probably mostly shows only those whose income sits between £50,000 and £60,000, where there is no logical option other than to take the Child Benefit payment and then hand some of it back as HICBC. The HMRC data is silent on the number for whom NIC credits are irrelevant, such as some two earner couples, and who thus choose to make no Child Benefit claim. 

Comment 

The HICBC can increase the effective rate of tax relief pension contributions as these reduce adjusted net income. 

Classification of company cars and vans for benefit in kind purposes

(AF1, RO3) 

HMRC is trying to raise awareness of how vehicles should be classified for benefit in kind purposes. 

On 20 July 2020 the Court of Appeal handed down its decision in respect of appeals by HMRC and Coca-Cola European Partners Great Britain Ltd. The case considered three different vehicles and whether they should be classified as vans or cars. 

The decision agreed with HMRC’s longstanding interpretation of the car benefits legislation, which is that for benefits purposes the ‘construction’ of a vehicle is that of the final product when it is made available to the employee, and the use to which a vehicle is put, is not relevant when considering the meaning of construction. The courts also explained that the correct approach was to determine what a vehicle was first and foremost suitable for. Only if the predominant suitability of the vehicles in question was for the conveyance of goods or burden, would it be accepted as a van. It should also be borne in mind, the courts ruled that a multi-purpose vehicle can have no primary suitability at all. 

You can read more guidance on helping employers determine the correct classification of a vehicle for benefit in kind purposes in HMRC’s manuals here. This will be of particular importance to employers that need to report company vehicles on a P11D prior to the filing deadline of 6 July 2023.

 

INVESTMENT PLANNING

FSCS compensation limit for bank deposits increasing soon

(AF4, FA7, LP2, RO2)

An easy question to start: How much each of individual’s deposits with an authorised deposit-taking institution are covered by the Financial Services Compensation Scheme (FSCS)?  

1. £50,000 
2. £75,000 
3. £85,000 
4. €100,000  

All the answers were correct at one time, but for now £85,000 applies.  

Now a slightly more difficult question: When was the limit last increased?  

1. 1 October 2008 
2. 1 January 2010 
3. 1 June 2012 
4. 30 January 2017  

The answer here is D. However, that increase was arguably no such thing. At the time the UK was still a member of the EU and therefore subject to a €100,000 limit under the European Deposit Guarantee Scheme Directive. Back in December 2010 the FSCS limit had been set under the same Directive at £85,000 to reflect the then €/£ exchange rate. Just over four years later, the limit was cut to £75,000 because of sterling’s relative strength. After the Brexit vote weakened the pound, the limit was restored to £85,000 in January 2017.  Thus, it is arguable that today’s FSCS deposit limit is unchanged from its level of over 12 years ago. Had it been index-linked to the CPI since December 2010, it would now be around £120,000.  

Last week both the Governor of the Bank of England and the Chancellor spoke about the potential need to raise the deposit protection limit, although neither hinted at a new figure. The driver for their comments was a lesson learned from the demise of SVB. The US equivalent of the FSCS, the Federal Deposit Insurance Corporation (FDIC) offers $250,000 (about £200,000) protection, but as SVB crashed the FDIC was forced to say it would give full protection to all SVB’s depositors. In part this reflected SVB’s unusual deposit base, 93.8% of which was uninsured according to S&P.   

Those exposed depositors, many in the Silicon Valley venture capital community, were able to withdraw their funds rapidly once worries about SVB started circulating. The speed at which both fright and flight spread explain the musings of Messrs. Bailey and Hunt. The UK’s last experience of a bank run was Northern Rock, back in 2007. In the sixteen years since, the world of banking and communication has changed enormously. A UK bank run today would be instant news and the queues outside (any remaining) branches would be replaced by a deluge of mouse clicks. Everything would happen that much faster and the bank’s coffers would drain that much quicker. 

In theory, the higher the depositor protection, the smaller would be the withdrawals and the greater the chance of bank survival, even if that meant a weekend shotgun takeover (see HSBC and SVB UK or UBS and Credit Suisse). The downside is that deposit insurance is not free and somebody (the banks and ultimately their customers) must pay for it.  

Raising the limit would also have other consequences, such as bringing more deposits to smaller banks, imposing greater reserve requirements on all banks and reducing the relative appeal of National Savings & Investment (which is 100% government-backed). As history shows, so far the UK banks have been successful in constraining FSCS cap rises.  

COMMENT  

Any FSCS deposit protection increase will take time to work through because the big banks will be as unenthusiastic as ever about the idea. Ironically, as the problem of SVB in the US demonstrated, it may be that the official cap is irrelevant and that, in a crisis, all affected deposits are guaranteed. But until the crisis hits, no central bank will want to say that given the moral hazard it would create.   

March inflation numbers

(AF4, FA7, LP2, RO2) 

The UK CPI inflation rate for March 2023 did not move as the pundits predicted: instead of falling below 10%, it dropped half as much as expected to 10.1%

 

The CPI annual rate for March fell by 0.3% to 10.1%. That was 0.3% higher than market expectations, which according to Reuters had been for a fall to 9.8%, escaping the double-digit level that has ruled since September. Both the Eurozone (down 1.6% to 6.9%) and the USA (down 1% to 5.0%) saw much larger annual CPI declines in March. A year ago, the UK March CPI reading was 7.0%, while the Eurozone and US numbers were 7.4% and 8.5% respectively.  

March 2023’s monthly CPI change was 0.8% compared with 1.1% in March 2022. The CPI/RPI gap was unchanged at 3.4% with the RPI annual rate also falling by 0.3% to 13.5%. Over the month, the RPI index rose 0.7%.

The Office for National Statistics (ONS)’s favoured CPIH index also fell by 0.3% to an annual 8.9%. Remember, recent news coverage of the 2.3% shrinkage of real earnings (excluding bonuses) reported by the ONS used CPIH data for December-February, not the higher CPI which would have shown a drop of about 3.4%. 

The ONS notes that the decrease in CPIH inflation was mainly due to the following factors: 

Downward drivers 

Transport The annual inflation rate for transport eased slightly from 3.1% in February 2023 to 1.0% in March 2023, down for a ninth consecutive month from a recent peak of 15.2% in June 2022. The rate was last lower in August 2020. The easing in the rate between February and March 2023 was caused by changes in the price of the motor fuels category. 

Housing and household services The annual inflation rate for housing, water, electricity, gas and other fuels was 11.6% in March 2023, down from 11.8% in February. The main driver behind the change was liquid fuels, with prices of heating oil falling by 6.7% between February and March this year, compared with a Ukraine war driven rise of 44.0% between the same two months a year ago. Heating oil accounts for just 0.1% of the CPI and CPIH shopping baskets. 

Upward drivers 

Food and non-alcoholic beverages Overall prices increased by 19.2% in the year to March 2023, up from 18.2% in February 2023. The ONS estimates that this is the highest rate of annual increase since August 1977 – over 45 years ago. The rise was driven by price movements from five of the 11 detailed sub-classes in the category. The largest upward effect came from bread and cereals, where prices rose in the month to March 2023 but fell a year earlier, leading to an annual rate of 19.4% in the year to March 2023. This is the highest annual rate for bread and cereals on record (with the series starting in January 1989). Within this detailed class, the upward push between the latest two months came from a variety of biscuits and cakes. 

Other smaller upward effects between February and March came from fruit, chocolate and confectionery, and meat, partly offset by a downward movement from oils and fats, where the annual rate slowed from 32.1% to 25.6%. 

The annual rates in March 2023 for chocolate and confectionery, other food products (principally ready-meals and sauces) and hot beverages were each the highest on record (starting from January 1989). 

Recreation and culture Overall prices for recreational and cultural goods and services rose by 4.6% in the year to March 2023, up from 4.1% in February. The increase in the annual rate came from a wide range of the more detailed classes. 

Four of the twelve broad CPI divisions saw annual inflation increase, while six saw a fall and two were unchanged. Housing, water, electricity, gas and other fuels was predictably still the category with the highest annual inflation rate at 26.1% (down 0.5% from last month). Next highest was food and non-alcoholic beverages at 19.1%, up 1.1% over the previous month. Four divisions (Transport, Communication, Recreation & Culture and Education), accounting in total for 3.27% of the new re-weighted CPI basket, posted an annual inflation rate below 5%. 

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was unchanged at 6.2%. Goods inflation in the UK fell 0.6% to 12.8%, while services inflation was unchanged at 6.6%.

Producer Price Inflation . Input prices rose by 7.6% in the 12 months to March 2023, down from 12.8% in the year to February 2023. The corresponding output (factory gate) figures were 8.7% against a previous 11.9%. Inputs of crude oil, and petroleum products, provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively. 

Comment 

A CPI inflation rate still above 10% - and the highest in Western Europe – is not what the Bank of England wants to see ahead of its next Monetary Policy Committee meeting on 10/11 May. The Old Lady will be concerned that core inflation (just over 75% of the CPI) remains at over three times the CPI target and has been churning around that level for the last year (please see the graph above). Such ‘stickiness’ that is being observed elsewhere – in the USA the core rate is 5.6%, 0.6% above CPI, while in the Eurozone the core figure hit a record high of 5.7% in March (against a CPI of 6.9%). The one solace for the Bank is that next month’s CPI will benefit from a major base effect. Between March and April 2022 the utility price cap rose by 54.3%: between March and April 2023 the Energy Price Guarantee means no change. 

With yesterday’s earnings figures up 6.6% in nominal terms, the market is now betting heavily on another 0.25% rise in interest rates next month. As things stand at present, it may not be the last.

 

PENSIONS 

HMRC: Losing your lifetime allowance protection

(AF8, FA2, JO5, RO4, AF7) 

HMRC has published new guidance Losing your lifetime allowance protection. This confirms that individuals who held a valid election prior to 15 March 2023 for: 

• Enhanced protection,
• Fixed protection,
• Fixed protection 2014, or
• Fixed protection 2016. 

the conditions needed to be met to rely on the protections are relevant only relevant prior to 6 April 2023. 

Elections made on or after 15 March 2023 will still be lost if “benefit accrual” occurs. 

It is worth noting that as at the time of writing none of the pages in the HMRC Pensions Tax manual have been updated to reflect the 15 March 2023 Budge changes.

 

Independent review on the increasing of the State Pension Age

(AF8, FA2, JO5, RO4, AF7) 

The government had kicked the question of when to raise the State Pension Age (SPA) to 68 into the long (post-election) grass. The announcement was made on 30 March, which was the final day before Parliament went into recess. It was also a day for, in those immortal words, burying bad news. The government issued a huge raft of documents (include 2,800 pages of ‘Green Day’ papers), which cynics suspect was designed to make press scrutiny difficult. 

One document that was part of the information flood on 30 March was the Independent Review of the State Pension Age by Baroness Neville-Rolfe, which the DWP commissioned in December 2021. This has received little attention because of the decision to have another review within two years of the next Parliament. It has been reported that Baroness Neville Rolfe’s report had been ready to publish since last October… 

While it has seemingly been consigned to instant irrelevance by the DWP’s second round of  procrastination, the 138 page report did make some interesting recommendations: 

• The target proportion of adult life in receipt of state pension which Cridland suggested in 2017 should be 32% should be nudged down to 31%. Furthermore, the Government should set a limit on State Pension-related expenditure of up to 6% of GDP (against a current 4.8%).  The review proposes that applying this cap ‘could be met through changes to SPA, eligibility rules or uprating’. Under current projections the 6% will be hit shortly before 2050, which would imply an SPA of 69 by 2048.   

• The legislated move to an SPA of 67 between 2026 and 2028 should go ahead. This is primarily a financial decision: the review says, ‘Given the very real economic challenges faced by Government and the stark increases in State Pension-related expenditure … it is not appropriate to increase costs further by postponing the move to age 67.’ 

• The move from an SPA of 67 to 68 should occur between 2041 and 2043. As a reminder, it is legislated at present for 2044-2046 and Cridland proposed 2037-2039. Approximately splitting the difference between legislative and Cridland dates is as an effort ‘to strike a balance: to reflect both the slower rate of improvement that we have seen in life expectancy and the rising number of older people relative to the working age population seen in higher old age dependency ratios.’ 

• The Government should ‘explore the possibility of an early access scheme whereby workers who meet certain qualifying criteria can access their State Pension early at an actuarially reduced rate. This could include individuals aged, say, 65 and above and with 45 years of National Insurance contributions or equivalent and should aim to help those who have performed physically demanding roles over many years.’ In the past the government has kicked back against such ideas because of the difficulty in making the selection and – unspoken – the potential increase in short term expenditure. 

• To counter ‘patchy’ awareness of SPA, the Government should: 

• Communicate to individuals their SPA at least 10 years in advance of them reaching this age. 

• For those already within 10 years of their SPA, issue such notifications a s soon as is practicable. 

• Monitor SPA and financial awareness regularly, a minimum of every two years, particularly amongst vulnerable groups and young people. 

The review also notes that SPA could be emphasised further if details were published by the Office for National Statistics alongside their estimates of life expectancy (eg their calculator), as is already the practice in the Netherlands.

 

PASA publishes guidance on engagement strategy

(AF8, FA2, JO5, RO4) 

The Pensions Administration Standards Association (PASA) has published guidance designed to support schemes in developing a modern engagement strategy as part of a successful digital programme. 

The guidance covers the six areas which should be considered within any strategy: 

• Creating an emotional connection,
• Creativity,
• Relevant and current,
• Inclusive & accessible,
• Make it easy, and
• Continuing to measure and learn. 

Kim Toker, Chair of the PASA eAdministration Working Group, said in their Press Release that: “Striving for a successful digital engagement strategy will ensure a better saver experience which is personalised to their needs. Behavioural science, combined with AI and technology, can be a powerful tool for increasing engagement and schemes need to ensure they capture the required information to utilise these tools.”
 

XPS: Pension funding levels fall, amid market volatility driven by the banking crisis

(AF8, FA2, JO5, RO4, AF7) 

According to figures from XPS Pensions Group (XPS), set out in a Press Release, the aggregate surpluses of UK pension schemes has more than halved over March to £25bn. The analysis revealed that, based on assets of £1,477bn and liabilities of £1,452bn, the aggregate funding level of UK pension schemes on a long-term target basis was 102% as of 30 March 2023. A fall in long-term gilt yields of around 0.3% led to an increase in the value of liabilities, worsening the funding level of schemes. 

Increases in scheme assets over the month, driven by many schemes’ hedged investment strategies, has partially offset these liability increases. However, drops in equity markets, caused in part by the high-profile collapse of some banks over the month, has had a detrimental impact on schemes’ overall funding positions. 

XPS Senior Consultant Charlotte Jones said: “The significant improvements in funding levels seen throughout 2022 have been partially unwound by falling gilt yields over March, driven by the banking crisis. This shock to the market shows that the volatility seen over 2022 looks set to continue through 2023. Any schemes without significant hedges will have seen plunging funding levels, rewarding those trustees that implemented de-risking investment strategies to lock in stronger funding positions.”

 
PLSA calls for State Pension reform

(AF8, FA2, JO5, RO4) 

Following the latest rise in State Pension payments, the Pensions and Lifetime Savings Association (PLSA) has highlighted its campaign for reforms to the pension system to help more people achieve a better income in retirement and has drawn attention to its Five Steps to Better Pensions: Time for a New Consensus paper. 

Nigel Peaple, Director of Policy and Advocacy at the PLSA, said in their Press Release that: “The Government was right to maintain the triple lock in the face of heightened inflation. In time, the state pension should be reformed so that it is set at a sufficient level to protect everyone — especially under-pensioned groups — from poverty. 

Alongside further state pension reform, so everyone achieves the Minimum Retirement Living Standard, to prevent pensioner poverty, the PLSA is calling for a timeline to set out a gradual rise in automatic enrolment contributions, over the next decade, so that by the early 2030s, they will increase from 8% to 12%, and contributions are split evenly between employers and employees. We also want to see the scope of the system expanded to improve savings amongst those not already included. A Bill has already been laid to allow a younger cohort (18–22) to qualify for automatic enrolment and begin from the first pound of earnings, however, the biggest lever Government can pull to meaningfully improve the retirement outcomes of millions of savers, is to set a timeline for increasing the minimum pension contributions paid into a worker’s pension by employers.”