Interesting assertion

but no article on pensions “reform” would be complete without special mention of Mr Brown’s act of pensions vandalism, when he removed the tax credit on dividends to help fund public spending. Without the abolition of this tax break, many funds would still be in surplus.

Is it actually true though? Anyone know?

Back when he did it it cost £5 billion a year, meaning a capital value of £50-£100 billion or so.

Is that enough to swing the whole system from viability to inviability?

10 thoughts on “Interesting assertion”

  1. A capital value, at the time. The whole point of that sort of savings being compounding of value? So what would £50bn be compounded over, say, 10 years? Over £80bn by 2007? Enough that the pension system would have been in crisis before the stock market collapse? Which the final salary scheme I was in at the time very definitely was.

    Obviously, the current deficit is inflated both by the poor performance of many investments over the past 4 years or so, as well as by some (necessary or otherwise) accounting changes.

  2. There was a report you might like to check out:

    The UK Pensions Crisis from the TaxPayers’ Alliance and Terry Arthur, a fellow of the Institute of Actuaries.

  3. He also reduced corporation tax though by 2% the same day and made a host of other changes, so those basically offset the ending of tax breaks. The Conservatives used to get terribly excited about this but the numbers didn’t stack up (surprise!)

  4. It shouldn’t affect whether schemes are in deficit now, because the actuaries should have done their adjustments when it happened.

    But it possibly had a behavioural effect, that it was the trigger for a lot of private sector employers to consider closing final salary schemes?

  5. Indeed I did. Matthew’s point on corporation tax is absolutely right.

    (Mr Evil: the whole point about working out the capital value of an annual payment is that it *includes* the effect of compounding, so no, GBP50bn is the whole figure, even if you ignore the tax cut).

  6. the whole point about working out the capital value of an annual payment

    You are confusing “Net Present Value”, i.e. what payment you would be rational to accept in return for forgoing the annual ‘payment’ and what that NPV would be worth 10 years later (you’d have to factor in inflation etc.) To say that £50bn in 1998 might be worth £80bn in 2007 isn’t missing the point. Especially as I was comparing Tim’s £50-100bn with Dan’s figure from the DT.

    Now, with other payments, you might argue that compounding is irrelevant because you would spend it rather than retain it, but this isn’t the case for pensions en mass.

  7. It is never as simple as some people think.
    Firstly before Gordon Brown took away the tax break most pension schemes were running a modest surplus BUT if they had more than a 10% surplus they were liable to lose their tax-free status.
    The pension schemes were overwhelmingly invested in equities and properties which provided a good hedge for their liabilities.
    Brown cut the value (not price but value to pension schemes) of equities, which made up around 75% of pension fund assets, by one-quarter so most schemes were immediately plunged into deficit.
    Secondly most quoted companies had to put extra money into their pension schemes.
    They then had less available to pay dividends, reducing further the value of the equities in which schemes were invested.
    So the £50 billion and £80 billion estimates which only look at the first-stage effect understate the impact
    Following the “raid”, the government introduced a whole range of measures that have added to the liabilities of pension schemes (such as pensions for part-time staff, inflation-proofing for leavers etc) and have required the scheme actuaries to value the liabilities at artificially low rates of interest.
    The second raid was holding pension schemes liable for the deficits of other schemes and demanding they pay a levy into the Pension Protection Fund. Further damage has come from the negative real returns on investment under the Labour government and most quoted companies have concluded they cannot afford to pour money into a bottomless pit and closed their Defined Benefit schemes.
    £50 billion was not enough to swing the whole system from viability to unviability but Gordon Brown was.

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