Tax cost to pension funds overblown

The original estimate of £4.5 to £5 billion came from the Treasury, so the consequences are to be laid at their door. It is unquestionably true that pension fund managers were led to believe that the cost to funds would be of that order and accordingly acted prudently (oh yes, that word) to alter their asset allocation out of UK equiities into other types of investment which were not perceived to carry that penalty. The consequences included the more dramatic fall in UK stocks when the crash came and the failure of the London market to recover to the equivalent of US levels even now, despite Gordon Brown's much proclaimed success of the UK economy in subsequent years. His other raids on business only account for some of the failure of share prices to reflect the apparent success of the underlying companies.

In short, the perception created by the Treasury caused a great deal of the damage, however much the true cost may have been, and i certainly doubt the PPI's figures. Even more important, it encouraged investors to make their investments abroad rather than supporting British companies - a pretty strange thing for the Chancellor of the Exchequer to do to companies in his own economy!

The causes of the crisis are much more complex, including a £19bn contribution holiday that companies took during the 1990s, 94% of which went to the employers and a mere 6% to employees.

For all the ferocity about the unacceptable "Gordon Brown raid", the supposed £5bn annual tax has helped finance Labour's extra £11bn annual spend on pensioners, most of which has gone to the bottom 40%.

And don't forget that 3 million higher-rate taxpayers, already walk away with 55% of the £11bn a year in tax relief.

I don't think politicians should be allowed to forget the other raids on pension funds which led to the current crisis:

The revenue believing that pension funds were just slush funds and so denying the employer a deduction unless funds were actually transferred within the AP in question. So a company in Financial difficulty is obliged by GAAP to recognise its pension obligation but gets no relief for this recognition - and to make matters worse

The crazy Conservative (lets not let them escape scot free) idea that as funds were being used as slush funds they shouldn't be allowed to build up a surplus ... so... every three years funds had to determine their actuarial obligation and if the funds held exceeded this figure by more than 5% then the excess had to be

a) used to improve member benefits
b) extracted subject to a 35% tax charge
c) the employer declared a pension holiday until the fund was brought back into balance and then...

well of course it didn't matter which of the three options the fund had chosen (most chose (c)) as soon as the stock market collapsed the funds found themselves in deficit.

And the government commissions think tanks to work out why there is a pensions crisis - and the answer is... greedy employers and feckless employees don't put enough into pension funds.

Sorry, if politicians and revenue officials had left their greedy sticky little mitts off the funds then there would be little crisis today. True funds would still have been hit by the stock market collapse but they would also have reserves to draw on.

Governments need to protect pension funds - but they - governments of both political parties - have signally failed to do so - and then act surprised....

Yet another think-tank joins the fray.

Reading the article in question it attempts to determine the effect on UK Pension Funds by discounting the governments own projection of additional tax take from the measure and then assumes a further offset because the reduction in CT rates allowed companies toi increase their injection into pension funds at no additional net cost.

It might have been rather more interesting to look at the actual effect on all UK Pension Funds by examining their total actual dividend income over the years - of course that would involve young Adam Steventon who wrote it in a little more work, wouldn't it?

Whether the tax take is £1.5,£3.5 or £5 billion these are still large amounts of money particularly compounded year on year!

By letting Gordon know that the yield (referred to as "cost" in the article) from scrapping the ACT reclaim turns out to be up to half that intended only means he will scurry around for other ways to make up the shortfall, slush fund or not.