Pension schemes investing in pooled equity funds will be able to reclaim dividend tax under rules proposed by the UK government.
Chancellor Philip Hammond included the measure in his Autumn Statement, published today.
According to the document, the government plans to “modernise” rules on dividend tax to allow pension funds to reclaim any tax paid by pooled funds in which they invest.
Draft legislation will be published in 2017 for consultation.
Teresa Owusu-Adjei, a tax partner at PwC, said: “On the positive side, this will give higher investment returns to smaller pension funds that pool together and go through a pooled fund rather than have their own segregated mandates.
“However, the vast majority of UK funds don’t actually pay UK tax because of various exemptions and deductions, so, while it will be welcomed, I see it as a small concession.”
The full text of the paragraph from the Autumn Statement reads: “The government will modernise the rules on the taxation of dividend distributions to corporate investors in a way that allows exempt investors, such as pension funds, to obtain credit for tax paid by authorised investment funds and will publish proposals in draft secondary legislation in early 2017.”
Elsewhere in the Autumn Statement, the chancellor announced an increase in borrowing, with an additional £15bn (€17.7bn) of Gilts to be issued before the end of the financial year.
This will bring 2016-17 Gilt sales to £146.5bn, including £43bn of long-dated and £35.4bn of index-linked bonds, which are in particular demand from UK pension schemes.
Vivek Paul, director of client solutions at BlackRock, said: “The colossal latent demand from pension funds for long-dated hedging assets far exceeds the additional supply that will stem from today’s announcements. Pension funds cannot rely on rising yields to escape their funding holes.”
However, Craig Inches, head of short rates and cash at Royal London Asset Management, described the additional debt as “a mammoth amount” for markets to absorb.
“The market will now need to digest two index-linked and one nominal syndication within the next 12 weeks,” Inches said.
“The market is placing a huge reliance on price-insensitive investors, such as [liability-driven investment] managers, to close their eyes and buy, but I fear even they may be a little less hasty in an environment where yields are rising.”
The chancellor opted to keep the so-called ‘triple lock’ on state pension payments, despite calls from some politicians for the guaranteed increase to be scrapped.
In his speech to parliament, Hammond acknowledged the need to “tackle the challenges of rising longevity and fiscal sustainability”.
However, David Blake, director of the Cass Business School’s Pensions Institute, criticised the lack of a decision.
“Once again, with the serious pension problems that this country is facing, the can is being kicked further and further down the road,” he said.
“The triple lock on the state pension is unsustainable – everybody knows that – yet the government is keeping it until the next parliament. All this is doing is passing an increasing burden onto the next generation – and this can only lead to increasing resentment.”
John Cridland, former director general of the Confederation of British Industry, is leading a review of the UK’s state pension age.
A consultation is open for responses until the end of this year.
The Autumn Statement also contained a number of substantial boosts to spending on infrastructure and housing, as reported in full by IPE Real Estate.