Investment arrangements and pension scheme borrowing are set to be overhauled as a result of the A-day pension changes.
Under the new rules, pension schemes will be able to borrow up to 50% of the value of the scheme’s assets. An employer can also loan up to 50% of the market value of the scheme for a maximum of five years.
And the more a scheme borrows, the more it will be able to borrow. For instance, if a scheme has assets of £2m, it will be allowed to borrow £1m, depending on finding a suitable lender. As the scheme’s assets are now worth £3m, it will be able to borrow a further £500,000. While it could carry on borrowing, most organisations are unlikely to allow the scheme to borrow more than two or three borrowing cycles.
For execs with self investment personal pensions (Sipps), where they would previously been able to borrow up to 75% of their scheme’s assets, this will be reduced to 50%, as above. While restrictions on certain investments will be removed – giving execs the option for further tax relief – they must be careful not to borrow over this amount.
Shares in the sponsoring employer will be limited to 5% of the scheme assets, although there is no limit on the number of shares that are traded on a recognised overseas stock exchange.
Pensions simplification could also be a catalyst for other interesting investment developments. Construction firm Vinci was recently the first pension scheme in the UK to buy a stake in its own private finance initiative (PFI) when it invested £980,000 to acquire a share in its Cardiff City Link project.