DYNAMITE REVELATIONS - A DAMNING INDICTMENT OF GORDON BROWN’S RECORD ON PENSIONS
Press Release from Dr Ros Altmann
1st April 2007
The papers which the Treasury has been trying to hide for years, but which have now finally been released under the Freedom of Information Act, are a damning indictment of Gordon Brown’s record on pensions. Despite the denials, these papers prove that the Chancellor was warned of the damage that removing dividend tax relief could cause to pension funds, but carried on regardless.
125,000 final salary scheme members robbed of their pensions
Gordon Brown must accept responsibility for the pension losses of those whose final salary schemes have failed since 1997. It seems that from the moment he became Chancellor he set about the emasculation of UK pension funds and ignored warnings that his actions could undermine pension scheme finances. He never treated the risks seriously. His advisers said “we agree that abolishing tax credits would make a big hole in pension scheme finances” and “some schemes will be pushed into actuarial deficit by the loss of tax credits. The pensions industry can be relied on to parade these ‘bad news’ cases as proof of their arguments” as if these arguments would not really be valid.
Well, 125,000 people and their families are testimony to the fact that such claims were indeed valid. These people were mostly in smaller schemes and their employers either went out of business or decided to wind up their pension funds after dividend tax relief was removed. The advice the Treasury received ignored these smaller schemes altogether. “GAD have only looked at some of the very big schemes…Much of the data is quite old and GAD have had to use some rough and ready assumptions to update it. Also we do not know whether the performance of the very big schemes is typical of those at the smaller end”.
Of course, it was smaller company schemes that were least able to cope with the additional costs of replacing the lost dividend income. The Chancellor seems not to have given the members of such scheme due consideration.
It is simply not sustainable to blame contribution holidays or the stock market crash now that we know that the Chancellor’s advisers already warned him the tax change could plunge schemes into deficit (“The CT package will therefore use up the remainder of these surpluses and bring forward the time when contributions have to be resumed and increased”).
Ed Balls defends the 1997 policy decision by saying that it was “the best thing from the point of view of the long-term investment opportunities of the UK economy” and that the Government was responding to calls from the corporate sector to remove a distortion in the tax system that was encouraging them to pay out too much in dividends rather than investing for the long-term. So, because the CBI wanted a more favourable tax system for UK companies, the new Labour Government decided to sacrifice the interests of unsuspecting pension scheme members and personal pension investors.
This is the most unbelievable revelation. It seems the Chancellor was determined to pursue his own priorities regardless of the risks. Effectively, he either did not understand or did not care that taking so much money out of pension funds, with no warning and no chance for some to make up the resultant shortfalls, would damage the incomes of those saving dutifully for their retirement – as Government had always encouraged them to do.
The decision to remove ACT relief, despite the warnings, was highly irresponsible. Gordon Brown even rejected the option of phasing the changes in – for example reducing ACT relief by 5% each year for 4 years, rather than removing 20% all at once. Given the uncertainties surrounding the likely effects, it would have been far more prudent to take greater care before acting. The advice clearly states that officials are not at all sure about the outcomes. “After talking to the GAD we think that the likely outcome is that pension schemes should be able to cope with the change. But this is a judgment and there are risks” (emphasis in the original).
Pension funds are not just pools of money, they have people’s lives attached. Particularly in the UK, where the state pension is about the lowest of any developed country, a private pension is essential to avoid poverty in retirement. Governments in the past had relied on final salary pension schemes to provide generous pensions. Without these, the state pension could not have been cut to such derisory levels. That is why we had built up a brilliant retirement savings culture in this country. At a stroke, the Chancellor put that at risk, despite being warned of the consequences for pension fund finances (and knowing that lower income groups would suffer most).
Treasury defence of its actions not valid
The Treasury rejects any criticism of the 1997 decision to abolish dividend tax relief, on the basis that all the money removed from pension funds was recycled back in corporate tax cuts. This is not a valid defence. Cutting corporate tax rates does not make up for taking money out of pension funds. That is like saying that taking money away from John and giving it to John’s brother does not leave John worse off!
Pension fund assets are completely separate from the sponsoring employer. There is no automatic mechanism for employers to put all the lost tax relief back into the pension fund. In most cases they didn’t. And, of course, many companies who benefited from reduced corporation tax do not provide pensions at all, yet their gain was financed by ordinary people’s pension funds.
Furthermore, the ACT removal came just weeks after sweeping changes had been introduced in April 1997, which were designed to protect members’ pensions if their scheme wound-up. A whole new funding regime – the Minimum Funding Requirement (MFR) – had just been introduced and Gordon Brown was advised that removing dividend tax relief could undermine this new funding system. “some changes to the MFR approach may be required as a result of the CT package”. He just took no notice.
This cavalier disregard for the interests of pension savers has been a hallmark of pension policy since 1997.
I have no doubt that he will go down in history as the one who presided over the destruction of our once-thriving pension system.
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