Earlier in the week I wrote about how UK finance minister Gordon Brown’s economic record is likely to be a poor one. If you ask many people about what they dislike most about the gloomy Scot, they will tell you of how he changed the tax rules in a way that sucked billions of pounds out of company final-salary pension funds. Hundreds of these schemes have shut their doors to new recruits and in some cases, like UK pest control business Rentokil, have cut the benefits of even existing pension scheme members. We are living for longer, and the shift in human longevity continues to push up pension liabilities. These liabilities are accounted for as a debt item on corporate balance sheets – something that has hit many businesses as a shock.
In the case of once-nationalised utilities like British Telecom or the airline, British Airways, the big black holes in their pension schemes are almost as large as the market value of these firms. Companies are pouring billions of pounds into these pension schemes to stay on the right side of Britain’s official pension regulator. No wonder that British Airways is suffering with its struggles against budget airline rivals such as EasyJet or Ryanair, and the impact of higher fuel costs and security-related costs.
One cannot pin all the blame on Brown for what has happened. Having a beer with fellow Samizdata contributor Philip Chaston last night, we agreed that in some ways that final-salary pensions were probably due to fade out or decline anyway, since they were part of an era when a person worked for one firm for their whole life, retired in their sixties and then had the good actuarial grace to drop dead. In an age when people change jobs regularly and live into their 80s and beyond, this particular form of retirement saving is not viable for many companies. In fact, over time, I expect many companies to cease running any significant pension schemes altogether. There is no doubt, however, that Brown has had a crushing impact on pensions, and his continued tax-and-spend policies are unlikely to foster a significant saving habit among the public. Quite the reverse.
I am writing this with a few minutes to go before a documentary on ITV looking at the scale of the UK pension meltdown. It is unlikely to be jolly viewing.
A few years before I was even aware of the libertarian ideas espoused by Samizdata, I remember going into my first job and being somewhat surprised to find that my company was going to contribute to my retirement fund. I obviously didn’t object, but I had always assumed that I was responsible for saving enough cash from my income to pay for my retirement, similarly to how I used to save a portion of my pocket money in order to buy something big in the future (in theory anyway, I never actually managed to do this).
Fortunately, I treated the company contributions as a bonus and still tried to put enough of my income into a pension to make a decent pot. But finding Gordon Brown’s taxation policies to be rather distasteful, I took off abroad where nearly every expat is expected to take care of his own retirement affairs and not rely on a company footing the bill. Nowadays, I have my own personal 25 year savings plan which I monitor like a hawk on a weekly basis and if it all goes belly up I can only blame myself.
What I find really odd is that this seems by far and away the fairest and most logical thing to do, but I’m met with howls of outrage when I suggest to certain groups that individuals should take care of their pensions instead of relying on someone else.
Tim, absolutely! One of the problems with corporate pension schemes, at least the sort I wrote about, is that they were borne out of the paternalistic view that companies should look after staff. Remember, many employees, until the late 80s, were forced to be members of corporate schemes. The rules still make it difficult for company employees to make their own saving arrangements although there have been moves to make the tax system a bit simpler.
It is sobering to reflect that in the mid- to late-Victorian era, there was already a substantial network of mutual aid and pension saving developing among the masses, including people who were fairly poor by any yardstick. Had that system not been shafted by the Liberals before WW1 and later on, we would arguably now have a deeply entrenched culture of saving and self reliance. It is one of the greatest tragedies of British social and economic history. It is a history that needs to be written because the scale of what happened has been almost obliterated by the establishment version of history.
Jonathon,
You are wrong to imply that Gordon Brown’s tax on pension funds (or rather on the dividends being re-invested into pension funds) affects only final salary schemes. This is not the case. It affects any funded pension plan, including the money purchase variety. It does not affect unfunded final salary schemes of the type normally offered in the public sector (since there are no investment returns to tax).
It may have hastened the closure of final salary schemes (and I agree with you that these were always going to fade away because it was never clear who was going to ensure that the fund had enough in it if the company concerned went bust or shrank appreciably) but the point is that it also reduced the value and growth of money purchase schemes whether of the company defined contribution variety or te entirely private variety.
So unless you are inthe public sector, he made it more difficult to save for retirement however you try to do it – and all to fund his present spending spree.
Incidentally, local government has about the only public sector FUNDED final salary scheme. This has also been affected by Brown’s tax and we have all been forced to make up the shortfall by increased council tax (as there’s no chance of downgrading benefits for the public sector).
HJHJ, no. The main and most marked impact has been on final-salary schemes, although other changes he has made have also affected savings generally. I work in this industry, and there is no doubt that final-salary pensions have been the main, but not sole, casualty.
Johnathon,
You are simply incorrect. Gordon Brown’s tax changes equally affect the funds invested in money purchase schemes.
It is just that in the case of final salary based schemes, the symptoms are different, and perhaps more immediate and dramatic. This doesn’t mean that the causes aren’t the same or that money purchase scheme members won’t also be seriously affected in the long term.
The pension holidays (ie they paid ‘enough’ into the pension pot but not all the profits form the funds invested, when the market crashed their return on investment wasn’t enough to cover the pension liabilites) that many of these companies took during the dot com bubble, is also if not more responsible for the hole in many of these companies pension funds.
Alex, I should add that one of the reasons for those “holidays” that you mention was the way in which surpluses in pension funds (yes, it seems a long time ago) drew unfavourable tax treatment. This started in the late 80s under Nigel Lawson, but Brown’s tax changes to corporation tax in the late 90s turned the screws dramatically.
Many firms can be blamed for being complacent in the good times of the 1990s, but the regulatory and tax rules of the time did a great deal of the damage. I simply do not see how the present mess could have arisen, among so many companies, without such state interference.
The moral of all this for me is that people should have direct control over their own private saving accounts and all such long-term savings should be exempt from tax. Period.
The person who immediately replied to me appears to be using my name! Anyway, I don’t think my original article did imply, as HJHJ said, that the only damage done by Brown was on final-salary schemes. Don’t read something into my articles that is not actually there.
Johnathon,
You referred to sucking billions of pounds out of company FINAL SALARY pension funds. In fact, Gordon Brown sucked billions out of ALL company pension funds whether final salary or not.
The clear implication of what you said was that final salary pension funds were/are different in this respect – which is not the case.
HJHJ, I mentioned final salary plans, yes, but just because I did so, did not mean I am ignoring damage that such tax changes caused elsewhere. I guess I could have mentioned all manner of other problems caused by Brown, but did not do so, since I like to keep these posts short.
In any case, the demise of final-salary plans has been so dramatic that I focused on this topic. Hundreds of schemes have shut down, the impact on livelihoods has been serious and one of the scandals of the age.
As I have a defined contribution pension I am suffering from GB’s assault on such savings, but I have to confess that I’m not too concerned at the death of defined benefit schemes. I worked with a company recently that had a DB scheme that was closed to new members. It was also a company that was in deep trouble in other areas, and younger employees were getting out as quickly as they could get new jobs, while longer standing employees were reluctant to leave for fear of losing their accumulated pension rights. The company knew about these fears, and used them as a weapon. At least with a DC scheme the balance is yours and you can very easily take it with you (I know you can have a DB scheme valued and take that, but the effect on your future pension is more uncertain, which is itself a reason to stay)
It is correct to say that the cancellation of the ACT credit affected all pension savings, as well as PEPs/ISAs.
The point about Final Salary schemes is that the company bears the risk of the final result, and thus has to make up the shortfall to produce the same end result. Pension liquidity rules mean they have to do so now.
Defined contribution schemes will just pay out less in the future.
Freddy, excellent point, and one that I think also answers HJHJ’s query as to why I did not mention other pension formats besides final-salary. You put it very well indeed. Ta.
should add that one of the reasons for those “holidays” that you mention was the way in which surpluses in pension funds (yes, it seems a long time ago) drew unfavourable tax treatment. This started in the late 80s under Nigel Lawson, but Brown’s tax changes to corporation tax in the late 90s turned the screws dramatically.
And since “A-day” the Revenue seems to be trying to extend the principle (its own principle, foisted upon successive chancellors not paying attention to the right things) that untaxed funds can make any level of losses, but gains must be punished and expropriated) to individual funds, too.