Treasury to increase defined benefit valuation factor

The Treasury has confirmed that it will increase the factor used for valuing benefits against the annual allowance from 10 to 16.

Currently, for final salary pension schemes, any increase in benefits over the course of the year is currently compared with the annual allowance by multiplying it by a factor of 10.

According to the document, ‘Restricting pensions tax relief through existing allowances: a summary of the discussion document responses’, a flat factor will continue to be used, although provision will be made to take some account of the increase in annual accrual attributable to inflation.

Following advice from the government actuary, the government has decided that the level of the factor used to value accrual will be 16.

The government intends to design a protection regime that supports individuals who have already made pension saving decisions based on the current level.

In order to provide sufficient time to design the protection regime appropriately, the government is intending to introduce the reduction from April 2012, with the reduced annual allowance coming into effect from April 2011.

David McCourt, senior policy adviser at the National Association of Pension Funds (NAPF), said: “The NAPF is pleased that the revaluation factor of 16 falls toward the lower end of the range (15-20) originally proposed by HM Treasury.

“This should help reduce the impact of individual calculations, including accrued service, to assess the level of deemed contributions in DB schemes.”

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