UK - The industry has heavily criticised changes to pension tax relief that will see the burden of cost shifted to pension funds, resulting in higher costs for defined benefit schemes.

Under new proposals coming into force next month, the annual allowance for tax-free contributions to individual pensions will be capped at £50,000 (€59,000), a significant cut from the previous level of £255,000.

Individuals who incur in excess of £2,000 in fees above the allowance threshold can then request these be deducted from their scheme benefits.

The National Association of Pension Funds (NAPF) said it was "extremely disappointed" by the decision, arguing that the low threshold would encourage more people to use the option, increasing the administrative burden for schemes.

Mike Smedley, pension partner at consultancy KPMG, agreed the proposals were bad news for pension funds.

"The burden has very clearly been put on the pensions industry and individual pension schemes - both paying the tax and also working out how exactly to reduce members' benefits as a result," he said.

"With no ability to recoup any administration costs from members, undoubtedly this will increase the costs of running defined benefit schemes."

David McCourt, senior policy adviser at the NAPF, added: "These changes will add cost and bureaucracy to what already is one of the most complex pensions systems in the world.

"This contradicts the coalition government's objective to minimise the burden on business and to reinvigorate workplace pensions."

Meanwhile, law firm Sackers has argued that a recent Department for Work and Pensions impact assessment on the switch to the consumer price index (CPI) failed to address the full cost for some schemes.

Zoe Lynch, partner at the law firm, said that, at present, it was unclear if pension schemes would have to provide a CPI underpin.

"At present, the way in which the easement from the requirement to provide an underpin is drafted leads to a patchy result and potential unfairness," she said.

Lynch added that the history of any fund should also be taken into account, especially if there have been mergers with other providers.

"If a scheme has had significant merger activity or had different categories of members historically, there may be many different increase rules," she said.

"Failure to implement the change properly can lead to incorrect payment of benefits, which may lead to claims in future."

Finally, the NAPF has seen its case on whether defined benefit schemes should pay VAT on their investment management services referred to the European Court of Justice (ECJ).

The initial case, heard in 2008, saw the ECJ rule that JP Morgan Fleming Claverhouse Investment Trust was, as an investment trust, a special investment fund and should therefore be exempt from paying VAT.

More recently, a tribunal hearing in London decided that the ECJ should be asked to clarify the scope and meaning of the ruling.

If the ECJ rules in favour of the NAPF and co-defendant Wheels Common Investment Fund, defined benefit schemes could be excused from an estimated annual VAT bill of £100m per annum. They would also be entitled to backdated claims in some cases.

Joanne Segars, the NAPF's chief executive, was keen to state the importance of a ruiling in their favour.

"This is an important case, and there's a strong argument defined benefit pension funds should be exempt from paying VAT on investment management services," she said.

"A successful outcome would benefit pension scheme members by cutting running costs and boosting the funds available for investment."

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