Government plans to kill off final salary pension schemes intensify

Last year the government and Pensions Regulator listened when business lobbied strenuously about the amount of money a company had to pay to the Pensions regulator to create a fund to take over pension funds in trouble and meet the payments to pensionsers.The levy came in?? at a lower level than orginally mooted.

This year they have quietly made a large increase in the required payments. The Regulator has?? to raise money under the government’s unfair and foolish legislation. Many companies will now face a large increase in?? their required payments, for two main reasons.

The first is the big increase in the total amount of money the Regulator thinks it needs, leading to an increase in the levy rates.

The second is the introduction of the pension deficits onto each company balance sheet, required by new accounting rules.?? Because companies with weaker balance sheets pay more, all companies with a pensions deficit now have weaker balance sheets than they would otherwise do because of the accounting change.

The irony is the government’s own position. The government’s balance sheet is flattered because this government just shows some of the outstanding debts. It misses out the estimated ??700 billion of pension deficit the public sector is running, thanks mainly to completely unfunded schemes where people have to rely on the future solvency and goodwill of the state.????It?? also misses out ??100-200 billion of off balance sheet liabilities for PFI, PPP, Network Rail and other items. It’s one rule for companies – show everything or face prosecution??- and one rule for the government – show very little and claim the rules do not apply to you.

The consequence of the government’s decison to set up a tax raising regulator will be to kill off??most final salary pension schemes. More and more companies??have shut their final salary schemes to new members, and some are trying to sell the closed scheme on or to wind????it up altogether. Companies are deterred from setting up new ones, because they have to pay twice – once for their own scheme, and again to help underwrite every other scheme.

It is sad that the UK’s pension position, the envy of Europe in 1997, has been so badly damaged in the last few years. It began with the government’s??large tax on pensions, taking around ??5,000 million a year out of the funds, and??the ??22 billion tax on the telecoms industry in the form of the sale of airwave rights. These two decisions led to a bigger decline in UK share prices, especially of the leading telecoms stocks, than elsewhere in the world. This??undermined the very strong solvency position of funds around the end of the last century which were heavily invested in shares ,including telecoms shares.

The problem has now been compounded by actuarial advice persuading or requiring Trustees to hold large portions of their funds in government debt. This investment strategy has undermined funds further in the last three years, when property and equity investment has been so much more worthwhile than holding government bonds. The flight into bonds has only benefitted the government, enabling them to borrow cheaply at the expense of pension funds. The pension??funds have had to buy more and more??government IOUs??regardless of the low returns to fill the gaping hole caused by the taxes and to meet the actuaries requirements.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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