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BP to book $700mn windfall due to pension tax changes

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BP is set to book a $700mn windfall due to tax changes aimed at boosting corporate pension fund investment in the economy.

Last year, chancellor Jeremy Hunt announced plans to relax the tax charge on surplus funds extracted by employers from company pension plans, with the changes to come into effect in April.

In its annual results, this week BP, which has amassed a $7.9bn surplus in its giant pension plans, noted the change was expected to help its tax liabilities by about $700mn.

“In November 2023, the UK government announced a reduction in the authorised surplus payments charge applicable to defined benefit pension schemes from 35 per cent to 25 per cent,” the oil major said. “The legislation has not yet been enacted or substantively enacted, but is expected to be effective from 6 April 2024.”

“The change is expected to reduce deferred tax liabilities by around $0.7 billion with the related gain recognised in other comprehensive income when the legislation is substantively enacted.”

Heather Self, consultant at Blick Rothenberg, a tax advisory firm, described the development as “a windfall [for BP], but only inasmuch as it is a reduction in a tax rate” as the booking of the $700mn gain was “an accounting requirement”.

BP is expected to provide more detail about the treatment of the tax liability change in its next annual report due to be published in March. The group said it did not currently intend to extract surplus from its pension.

The pension tax change is expected to be closely watched by other corporate sponsors of “defined benefit” plans against the backdrop of much-improved funding positions.

Thousands of company pension plans in the UK have amassed surpluses over the past 18 months, thanks to interest rate rises driving down the cost of pension promises.

Meanwhile, pension experts said the tax changes, and broader efforts by the UK government to incentivise pension investment in areas that can help the economy, were having an impact in the boardroom, with some now looking to extract pension surplus.

The government believes that well-funded pension plans could potentially generate more surplus, for use by employers and to benefit members, by investing in return-seeking assets that also help the UK economy.

“There’s a recognition of the potential upside value from future [pension] surplus for both members and employers,” said Stewart Hastie, partner at Isio, a pension consultancy.

“Companies are exploring avenues such as merging group schemes to maximise the benefits of surplus funds and schemes are establishing frameworks outlining agreed terms for distributing future surplus above a certain threshold.”

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