Osborne didn't strike out

mart

And they say it took Labour MPs a long time to notice the horrible effects of a doubling of the 10p band to 20p.

It's taken everyone (maybe Mr Littlejohn is an honourable exception, I don't read him often) a long time to start noticing the raised tax on pension funds.

I hope people can be adequately informed of the net effect to them of this wheeze. We need something of the clarity of "tax freedom day" that some newspapers mention each year.

Just how many pounds per week less will our retirement pension be as a result of these changes? We should be told.

Tiberius

I'm sure the Tories have been cottoning on to the pensions raid since William Hague was leader, but as in the case of so many other NuLab acts of treachery, no one has wanted to listen. That phenomenon is abating now, and I'm sure the Tories will have a lot to say on all the issues many of us have been ranting about for years with some purpose. On the Grangemouth strike, I could not believe BBC News last night, when it reported the decline in final salary pension schemes but failed to mention why so many had closed. It made Humphreys look like a Thatcherite.

James J

Our political classes seem to think that future generations of taxpayers, without private pensions of their own, will pay high taxes to support the pensions of former public sector workers.
One can only admire their faith in human nature.

mart

Tiberius: final salary schemes can be closed for other reasons - eg. a company wants to limit the scope of its liability. Final salary schemes cost a lot, and a company's financial commitment to them has to be re-assessed as the years go by. The costs of defined-contribution schemes are, by contrast, easy for a company to assess and plan for, well into the future.

If there's anything I don't understand, it's the supposed link between Mr Brown's increased tax on pensions and the closure of a particular company's final salary scheme to new entrants.

I'd love to understand that point.

David

The Conservatives have been well aware of the implications of the pensions tax, not least because I wrote to successive Shadow Chancellors/Financial Secretaries to remind them - Heathcote-Amory, Portillo, Letwin to name but three. The Conservatives opposed the measure in the Finance Bill when it appeared at the time but got nowhere because of the overwhelming Labour majority.

Conservative policy now concludes it is a lost cause because so many final salary schemes have been abandoned. (George Osborne, BBC Politics Show, 27 November 2005). I think this is a realistic assessment. New ways will be needed to encourage savings.

The pension tax is a classic example of a stealth tax. Company pensions schemes had, from 1921 had been based on the explicit, IR approved, basis that deferred income saved in approved pension schemes would not be taxed until later when it was paid as pension income.
Brown`s pensions tax changed all that. The assumption on which such schemes were assessed actuarially were fundamentally altered by the £7 billion a year extra cost that would have to be absorbed (by employers and/or employees) if the scheme benefits were to be maintained. The schemes were no longer viable as set up. They either had to be altered (via reduced benefits) or closed or the extra £7 billion funding added each year by emploers/employees. It is no surprise that schemes have been closed to new entrants by the thousands. Lets us hope that those that remain open remain solvent long enough to pay the benefits that their pensioners look forward to.

Tiberius

mart: I am aware of the nature of both types of scheme. Final salary schemes became unsustainable in the 2000s because of low inflation and subsequent low returns on low risk investments as funds were obliged to move out of riskier investments for reasons of compliance; the accounting standard requiring shortfalls to be recorded on the company balance sheet; but mainly because funds lost a huge chunk of their income to Brown's tax regime. With no corresponding reduction in liabilities (indeed increases in members' life longevity made matters worse), final salary schemes became unaffordable. New entrants produce the same problems: 2/3 of final salary from a fund that cannot hope to provide the sum required under existing investment and tax conditions. Hence, as you observe, the switch to defined contribution scheme, where the employer has a defined liablity, and the individual bears the loss of the returns.

Ian C

Mart, the pension raid was abolition of tax releif on dividends received by pension funds on company shares they held, through the abolition of recognition for tax reclaim purposes of the (advanced)corporation tax paid by the compannies on their dividends. Final Sal. Pension funds value themsleves substantially on the yield on their investments(dividends, interest etc). Remove 1/3rd of the dividend yield through loss of tax relief and the valuation of a funds assets/liabilities means it is overnight more expensive to provide a 'Final salary' scheme. This was all at a time when new accounting rules for past leavers of funds and restrictions on investment risk allowed by fund trusteess had already increased the cost to an employer of providing this type of perk. It is well recognised by accountants/ the city etc that the £5bn was per annum, and not a one off hit, but not by the wider public. As dividends grow this means that the future tax take from the raid gorws each and now after 10 years of profits growth is vast - but noone has made any real political capital. Furtehrmore, the stockmarket has not provided much in the way of capital growth during the period of nu Lab in power (all the venture capitalists have taken that by buying the best companies out), F/S pension schemes are a dead duck but for all but the wealtiest of employers. Add all this to other rises in NI, non-indexation of the 40% tax rate level, working directives etc. and you have a major problem today as an employer compared to 10 years ago. The boom has hidden it, but just watch that all unravel in 08/09. The time is ripe to hit Brown on the pension and other raids because the full effects are about to felt as there is c £70bn missing from British pension funds. And what have we got for it? Becasue of the boom there has been no point in raising it - just wish that this had been deliberate on the Tories' part!

Fraser Nelson

Mart, you sound like you know your Onions so you can perhaps say what you think of the theory. Final salary pension schemes are expensive to run - but it was manageable in the days before Brown started raiding. Now there is £100bn less in the collectively pensions kitty, its far harder to make ends meet. Companies have to be meaner. This means closing the scheme to new entrants. There are other factors, of course, but the dividend tax credit when it existed made final salary pension schemes that much more affordable. Helen Nugent's piece about Brown being warned about the DTC abolition is here http://business.timesonline.co.uk/tol/business/money/pensions/article1593939.ece

mart

I'm grateful for the explanations folks. Most helpful.

Fraser, I confess right away I'm no expert. But I know of a big UK company that had already closed its final salary scheme to new entrants before 1 May 1997 -ie. before the tax changes.

My mind also goes back to stuff I heard in a TV documentary, and summarised also in this Times article from 2005, concerning large pension commitments by firms in the US -ie. firms virtually unaffected by these UK tax changes.

I quite agree with the underlying points made here though: the extra tax on our savings (isn't that a clearer way of expressing what's going on here?) is going to make us poorer in retirement. It probably also contributes to closures of final salary schemes.

But all I'm saying is that the extra tax is not the only factor.

TGF UKIP

There is another item of Brown's pension fund larceny which has received amazingly little attention yet whose impact is probably on par with the abolition of Dividend Tax Credit. I am speaking of stamp duty on commercial property and as corporate and insurance company pension funds are far and away the largest owners of commercial property in the UK Browns jacking up of stamp duty from 1 to 4% must have also removed billions from pension funds since 1997. I have never seen, even in the property press, a figure put on this heist but as institutional property transactions are inevitably in tens of millions, at least, I would have thought that one of the big actuarial firms must have at least attempted to quantify this additional 3% tax on pensions. Any other Coffee Housers with info on this?

Gordon Hauser

the problem with final salary schemes is that you might draw the pension for longer than you work. My sister's pension was worth more than the sum of her earnings when she left the employ of a local council. When wages are quoted they should include the value of the pension commitments of the employer. Public employees would suddenly shoot up the wages charts.
Also, is there anywhere to complain about Councils being an unaccountable brake on productivity. Our council has just asked for a trial hole in a pavement outside one of our sites. They will then take three months to issue the licence to allow our licenced contractor to dig the hole. Should they not be enablers?

Fraser Nelson

Ian C, if the figure was for £5bn in 1997 have you seen any estimate of what it will be now?

Ian C

No Fraser, but I would guess that dividends have grown at c 7-10% pa since so a rough calc. based on a £5bn Yr 1 cost would put it in the £70-100bn. It's so large that if you quote the lower figure you can't be accused of over-egging it.

Ian C

I was formerly in the pensions business (sales/marketing not technical). Tiberius is right that compliance paid a part. It was a huge part - compliance with rule changes introduced under Major! So be careful. The real difficulty was that F/S schemes are bad for people who change jobs (the majority) and the values left behind by same were pitiful until those changes in the 90's. At the same time accounting standards were tightened (all sorts involved with those eg. stock exchange) so that any pension fund deficits, even if they could be put right over a few years, had to be shown on the balance sheet as negative item. This was introduced at around the top of the market along with restrictions on the % a pension fund could hold in growth investments. They could have lived with that in a stable climate given a new period of satbilty governing employment, but subsequent withdrawal of pension funds form equities depressed the market at the same time as dot.com bubble so no growth in capital values on equities. Then along came the tax raid at the same time and finished them off completely. SO you have to be careful - Brown did a tax raid but is was the final straw, not the one and only cause. If he was as 'prudent', as he was claiming at the time he would have seen that the tax raid would be thus devastating -he didn't because he did not have to look for it with their vast majority and a decimated opposition. It was a pure tax raid that would be seen, due to the technicalitie, as a company tax change not a tax on pensions. Now it's about to bite him - I had a letter in the S/Times in Nov 2003 predicting 'Eurosclerosis' in Britain from 2005/06 onwards. It is only just happening now, but it is going to be far worse than if it had been back then.

Fraser Nelson

Ian C, so taking yr 7% figure would the annual draw move from £5bn in 1997 to more like £10bn in 2008?

David

Any figure for the cost of the tax is only an estimate, initially put at c£5 billion a year tho` others later estimated it at c£7 billion a year.

You need to remember the compound effect of this on pension funds - it is not just the cost of the tax but also the loss of returns that otherwise would have been earned on those funds - that is what leads people to estimate the cumulative cost at c£100 billion.

I agree with earlier comments about the impact of the regulations - not very sensible in my view - and greater life expectancy on pension fund liabilities. But I do not think these were the decisive favtor in the widespread extinction of final slary schemes. That was/is down to the Brown pension tax.

Ian C

Fraser at 7% pa you double your starting sum every 10 years! SO loss in Yr 1 is £5bn loss in yr 10 is £10 bn. The magic of compound interest. And as David says you can add the other returns lost, eg capital growth that might have been there but for the slower (nil) growth in equities, as a result of the reduced attraction of dividends. Far better for companies needing funding to pay interest on borrowings (tax reliveable) if divis are a less attractive way of rewarding funding sources. Hence the big move into private equity and leveraged buy-outs and reduced returns from quoted companies. This was a trend that was under way in 1997, but Brown came along and the laws of (some would say) unintended consequences came into effect with his raid on pension fund dividend tax credits. This gave the whole thing a huge shove in the direction it has subsequently gone, with consequences towards the credit crunch we are now in from the increase in leverage as a tool. The effect of the tax changes were entirely forseeable and the big accountants all said it would happen, because they sit down with every rule change and decide what is the best advice for their clients. What was less foreseeable but easier now with the benfit of hindsight was the contributory effect on the credit crunch. But the Tories can no longer be blamed for this new macro-economic environment this helped create. GB this morning was busily pointing toward 'turmoil from America' as the source of our woes. I don't think so. The worst is probably over in the US. It has hardly begun here, although we will be helped when America signals no more interest rate cuts and the $ starts to recover.