BALPA Response to – “Restriction of pensions tax relief: a discussion document on the alternative approach”

Set out below is the response of the British Air Line Pilots Association (BALPA).

BALPA is a professional association and trade union representing airline pilots, helicopter pilots, flight engineers and helicopter winch-men. It represents approximately 9,000 members employed by airlines and helicopter companies based principally in the United Kingdom.

Further details may be obtained from: http://www.balpa.org/

In principle BALPA is opposed to further restrictions on pensions tax relief but prefers the Government’s alternative approach to that proposed by the previous administration. It welcomes the Government’s recognition of the benefit of administrative simplicity and the need for individuals to be able to understand the new arrangements, so as to allow them to comply.

BALPA is concerned however, that the need to tackle the fiscal deficit does not determine arrangements which may hasten the closure of defined benefit pension schemes, or lead to individuals making inadequate provision for their retirement and, hence, increasing the demands on the public finances in the longer term. It would, therefore, encourage the Government to provide for the arrangements to be reviewed on a regular basis and, when the public finances permit, for the Annual Allowance (AA) to be increased. . This would be in addition to annual increases to the value of the AA and the Life Time Allowance (LTA) to account for inflation. It is BALPA’s view that such increases should be a minimum of 2.5 per cent, or in line with earnings or prices, whichever is greater.

BALPA would also draw to the Government’s attention the work of Oxford Economics (Restricting pensions tax relief: an alternative policy proposal) which demonstrated a reduction in the AA to £50,000 would yield around £2.9bn annually to the exchequer. Further, there is clearly a relationship between the LTA and the AA and for a commercial pilot, in a DC Scheme, to attain an LTA of £1.5m-£1.6m (see 6 below) when legislation restricts their career to the age of 65, the AA would need to be set at this level or higher.

BALPA’s response on the specific issues raised in Chapter 5 of the discussion document is as follows, using the numbering in that document:

1. BALPA would support the removal of exemptions from the AA test in the year the benefits come into payment and for individuals claiming enhanced protection under the Finance Act 2004 tax regime.

2. BALPA would support the continuation of the newly accrued annual pension in a DB arrangement being valued using a flat factor of 10. If the Government is minded to increase the factor as a result of advice from the Government Actuary’s Department, BALPA would urge it be set at the lowest possible level and not more than 15. A higher value than 10 would be of particular detriment to members at younger ages, where the factor on an actuarial basis is potentially less.

3. BALPA is of the view that the inclusion of deferred members would place unacceptable administrative burdens on schemes and, in the interests of fairness between active and deferred members, the existing flat-factor methodology should be amended to include revaluation of the previous year’s benefits i.e. the value of the benefits at the beginning of the year should be revalued.

4. BALPA would support exemptions from the limit in the case of death and ill health (see also 5 below) and sees no need to change the rules that cover pension debits and credits and transfers with a reduced AA.

5. BALPA would urge the Government to distinguish between ill health retirement and redundancy. Ill health pensions are usually only granted where there is no reasonable prospect of an employee returning to work and after a lengthy period of sickness and medical assessment. In the case of BALPA members, ill health pensions are provided as a result of the Civil Aviation Authority (CAA) suspending the individual’s licence and effectively bringing their flying career to an end prematurely.

6. BALPA would support a reduction in the LTA to £1.5m-£1.6m, subject to the retention of the current valuation factor for DB Schemes of 20, with a view to setting the AA at the highest possible level, but with provision to protect those with pension savings that, as of 6 April 2011, exceed this level.

7. BALPA would support capping relief at 40 percent to enable the AA to be set at the highest possible level.

8. BALPA would be opposed to scheme redesign as the measure to address large one-off increases in pension benefits. Instead it would support a smoothing of the effect by an averaging over a period as suggested in sub-paragraph 3.9 (2) in the discussion document. In the case of BALPA members, increases that lead to large one-off accruals are most likely to occur where an individual is promoted from Co-pilot to Captain.

BALPA would also support a similar arrangement when the AA is undershot in a particular year, perhaps because of a pay freeze, and where the AA in subsequent years would be increased by a corresponding amount.

BALPA would be in favour of support mechanisms for charges over a certain level, such as those proposed at 3.12 of the discussion document, and would be keen to participate in any further consultation on mitigation measures beyond September.

9. BALPA would support the alignment of the pension input period to the tax year, to assist individuals in complying with the new arrangements, for the reasons set out at 4.11 of the discussion document.

10. BALPA would support an obligation being placed on schemes to provide, on an annual basis, a statement that either confirms that the value of the individual’s benefits from the scheme that were accrued over the tax year are within the limits prescribed or, if this is not the case, sets out sufficient detail of the excess that will enable the individual to comply with the Self Assessment system.

11. As BALPA is not a scheme administrator it is not in a position to offer a view.

12. As BALPA is not a scheme administrator it is not in a position to offer a view

13. As BALPA is not a scheme administrator it is not in a position to offer a view

In conclusion, BALPA would urge the Government to give careful consideration to the points raised above and to allow sufficient time between legislation and the introduction of new arrangements for schemes to enact any changes required that would enable individuals to aim off a reduced AA.