Tuesday, April 03, 2007

Who Nuked Our Pensions?

Hurry up and die, can't you

According to Balls and Gordo's propaganda hand-out, what really did for our final salary private sector pensions was not their tax grab, but:

  • the stock market fall around the turn of the century, which accounted overwhelmingly for a reduction of around £250bn in the market value of occupational pension scheme assets between 1999 and 2002

  • many firms made the decision during the 1980s and 1990s, despite rising liabilities, to take contribution holidays, believing a bullish equity market to be a long-term trend

  • rapid rise in life expectancy

Clearly all of these factors had an impact. But there are one or two important wrinkles Gordo doesn't mention.

First, although the equity market took a big whack from the dot.com collapse, it's recovered since, and it's actually up overall since 1997- by about one-third. So that widely quoted £250bn is a very partial picture, a snapshot designed to produce as big a negative figure as possible.

In reality, over the last decade as a whole, pension funds' equity investments have made money for them. In sharp contrast, Gordo's tax grab has been an unmitigated cost, of between £50bn and £100bn depending on whether you believe the Treasury or this respected Fellow of the Institute of Actuaries.

Second, while many firms did take contribution holidays during the 1980s and 1990s, the practice was actively encouraged by the Inland Revenue. IR rules made it impossible for sponsoring employers to get surpluses out of the fund in any other way. What's more, they were penalised if the surpluses exceeded a certain proportion of the fund (the IR reckoned companies might use their pension funds as a tax shelter).

It wasn't a simple matter of companies expecting bull markets to continue for ever: there were powerful government incentives for companies to keep surpluses as small as possible. And since Gordo was in a position to change them, he can't now use contribution holidays as a "not me guv" excuse.

Third, increasing life expectancy is a problem for all pensions provision, both private and public. Everybody from Adair Turner down knows that the only sustainable solution is to ratchet up our pension age to 70 plus. But in our magnificent welfare state, nobody can expect private companies to make the first move. The benchmark is set by the state pension age.

If Gordo had been a stronger more strightforward politico (hah!) he'd have gripped this very real and pressing problem. Instead, he entirely flunked his own responsibility over those public sector pensions (which are still final salary, still pay out at 60, and still largely unfunded), and dumped even more costs on our funded private sector schemes.

The fact is that throughout the last 15 years or so, instead of addressing the underlying issues, successive governments have landed more and more burdens on our private sector pension schemes. Starting with the post-Maxwell panic, they imposed more and more regulation and sought to turn a "best efforts" pensions promise into a cast iron guarantee.

Unsurprisingly, sponsoring companies didn't like it. Coupled with the asymmetric tax treatment of surpluses, it meant that by 1997, many big companies were already thinking seriously about switching their pension schemes from the traditional final salary arrangement to the cheaper, and for them, much less risky, money purchase plans (Defined Contribution). Some had already acted.

Into this tricky situation in 1997 comes a bright new Chancellor. A self-styled man of prudence and probity.
But instead of saying "I say chaps, there seems to be an impending pensions crisis here- I'd better get a grip on the issue of pensionable age pronto", he says "Who's got some cash I can blag?" And although some officials do vaguely mention that a completely unheralded multi-billion grab just possibly might speed the switch away from final salary provison, most of them just crunch the numbers and rub their hands at the increasing tax revenues.
For sponsoring employers the message is clear: Brown doesn't attach any priority to maintaining final salary provision in the private sector, has just made the whole proposition far more expensive, and might well come back for more if "windfall" surpluses get too big. Sure, there's a stay of execution while sponsors ride the stock market bubble, but once that bursts, the collapse is swift and sure.
Gordo's defence on pensions is even shakier than his neighbour's grip on reality. He isn't just some detached punter who happened to get unlucky on the stock market and happened to get waylayed by a surge in the number of pensioners outliving their usefulness. No. For the last decade he's been Britain's Chancellor. And his job is meant to involve solving financial problems, not making them worse.
The charge remains. Brown's pension nuke doomed Britain's final salary pension provision.
Unless you work in the public sector, that is.


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