BROWN’S TAX GRAB ON PENSIONS ROBS US OF £20,000 EACH

UK Express, UK 
Sarah O’Grady Social Affairs Correspondent
 

Workers will lose more than £500billion after his decision to scrap tax relief on dividends paid into pension funds back in 1997.
 

After a two-year legal battle, new documents released under the Freedom of Information Act reveal the then Chancellor ignored warnings that his move could   leave a “big hole” in pension funds for future generations.
 

His decision wiped out up to £75billion of assets. Critics  blame him for the closure of many final-salary pensions which has left retiring employees out of pocket.

Tax expert Maurice Fitzpatrick, of accountants Grant Thornton, said the raid will cost funds £500billion, or a third of their value, by 2027.
 

He added: “The figures for European state pensions show how necessary it is for Britons to make their own retirement provision. Each household has lost £20,000 worth of pension funds.
 

“Now, as the country marks the 100th anniversary of the state pension, the chickens are coming home to roost.”

Mervyn Kohler, of Help the Aged, said: “While the raid looked do-able in 1997 when the stock market was buoyant, it went pear-shaped when the market subsided in the early 2000s.’’ While Britain once had the world’s best state provision for the retired, recent figures show the UK is now the pension miser of Europe.

Economic view  October 16, 2006
Regulation killed the pensions industry

By Anatole Kaletsky of The Times 

THIS WEEK Gordon Brown will hold the first meeting of his newly created financial services task force, a group of top financiers brought together to ensure that the City of London retains its global dominance.

The members of the task force will complain about corporate taxes and stamp duties, which are now higher in Britain than in many other European countries. But an issue unlikely to be raised by the Chancellors task force is the one that, in my experience, is the elephant in the room when it comes to the very personal loathing in the City for Gordon Brown pensions.

The collapse of Britains occupational pensions industry has been the biggest mishap to befall the City in living memory. The regulatory demands to close pension fund deficits are costing the shareholders of British companies far more than they could lose or gain through any conceivable reform in taxes. Yet the causes of this disaster are viewed in the City and the business community as no longer worth serious discussion.

There is a widespread belief in the City and the business community that the disintegration of the countrys once-proud pensions industry has been mainly the fault of the Chancellor. The policy usually cited is the ££5 billion tax raid perpetrated against the pension funds in Gordon Browns first Budget. This abolished the complicated Advance Corporation Tax (ACT) rules, which gave UK companies big incentives to make dividend payments to pension funds and other tax- exempt institutions, rather than retaining profits for internal investment and organic growth. Belief that the abolition of ACT was the main cause of the crisis in Britains private pensions and the consequent decline of the British life assurance industry, which used to be the biggest in Europe and is now among the smallest, has acquired a huge political, financial and economic importance.

Political because the destruction of private pensions since 1997 is probably the most serious indictment that can be laid against Gordon Brown. Financial because the demise of pension funds can be blamed for several of the most important distortions in British financial markets: the flight out of equities into bonds, the consequently weak performance of the London stock market in relation to other leading markets around the world; and the low rates of investment by many British companies, which have been forced to use their spare cash to eliminate deficits in their pension funds, instead of using these profits to reward shareholders or improve their businesses by undertaking productive investments.

But have changes in the tax treatment of pension funds really been responsible for the demise of the pensions and insurance industry? I believe the answer is no. It is true that Britains pension and life insurance industries have been destroyed by Government, but the damage was done by regulation and litigation, not by tax reforms. The traditional life companies were effectively put out of business by an economically illiterate court judgment in 2000, which effectively bankrupted Equitable Life, the countrys oldest and in many ways best-run financial institution. When the House of Lords judges forced Equitable Life to pay out bonuses that were always conditional on investment performance as if these were contractual guarantees, they did not just capriciously reverse centuries of established precedent - they revealed a lack of understanding of investment principles whose consequences have become even more apparent in the unravelling of the pensions business.

The disintegration of the pensions industry began with the ratcheting-up of regulations (mostly by the 1990-97 Major Government), which converted discretionary benefits such as inflation-proofing, spouses pensions and upgraded treatment for early retirees into legally enforceable contractual obligations. The next stage was the introduction a bond-based Minimum Funding Requirement to guard against the possibility of fraud by the sponsoring employers, in a panic reaction to the scandal after the collapse of the Robert Maxwell newspaper and financial empire.

The last straw was the introduction of the FRS 17 accounting standard, which required immediate full recognition of pension liabilities discounted by a low-risk corporate bond yield. Once FRS 17 was introduced, the game was up for corporate pensions, but it is wrong to blame the accountants for this. It was politicians who turned actuarial estimates of future pensions payments into bond-like commitments, just as the judges turned the discretionary bonuses promised by Equitable Life into the cast-iron contractual obligations that bankrupted the company. Once this happened, FRS 17 was a logical (if exaggerated) response from the accountants.

By turning pensions into cast-iron guarantees that therefore had to be funded with bonds rather than equities, the new regulatory approach made the provision of defined benefits unsustainably costly. If a pension promise has to be absolutely guaranteed by the sponsoring company, then regulators and accountants will quite understandably insist that the assets that back up that promise are as close as possible to risk-free.

And this, in fact, is what accountants and actuaries are increasingly suggesting, telling companies that all their pension investments should be in low-risk bonds, which can closely match the cashflows they will need for their future pension payments. The trouble with this approach is that low-risk investments will, by definition, produce low returns.

And these low returns have now made it impossibly expensive for companies to provide the generous pensions that British workers learnt to enjoy in the days when pension funds could be invested mainly in higher-risk, higher-return assets. Once pensions were turned into contractual guarantees, the defined-benefits pension industry in Britain became a dinosaur. All Gordon Brown did with his ££5 billion tax raid was to put defined-benefit pensions out of their misery a little faster. Until Britains Establishment understands that it was regulation, not taxation, that killed the pensions industry, other parts of the City could succumb to a similar fate.