Of all the stealth taxes dreamed up by the Chancellor Gordon Brown in his decade in office, the pensions tax was by far the most obscure. It wasn’t a tax for a start, but a tax break, a loophole. Ten years after closing it, the Chancellor is now in the dock for wrecking the pension prospects of a generation.
However, while the Chancellor must share the blame for the collapse of the pensions industry, this particular measure was only a small part of the problem. It’s always tempting to blame the politicians when things go wrong, and the Brown has allowed himself to acquire a reputation for dodgy fiscal manipulation. But there is more to this story than treasury sleight of hand.
The ending of dividend credits on advance corporation tax baffled most hacks – this one included – when Brown announced it in 1997, alongside measures like the windfall tax on the privatised utilities and the national minimum wage. Few financial journalists even appreciated its significance.
The dividend relief appeared to benefit wealthy people with big pension funds rather than the little people in public sector jobs and so scrapping it seemed to most Labour MPs to be acceptable in the context of a tight spending round.
Even the civil servants who are now said to have been warning Brown against scrapping dividend relief were divided about its impact. Treasury papers released under the Freedom of Information act reveal that officials at the time thought that the measure might cut the stock market by 20%.
This was quite erroneous. The FTSE collapsed three years later, but not because of the removal of dividend relief. It was the dot-com madness of the late 90s that led to that.
The anonymous treasury mandarins also warned that final salary pension schemes might be at risk, and personal pensions would lose out, both of which forecasts were correct – but for the wrong reasons.
The collapse of occupational pensions arose largely from the restructuring of the corporate private sector, under the pressure of globalization, and the ending of the life-time career.
Firms no longer valued their long term employees enough to want to pay for them indefinitely.
Private companies have been dumpng occupational pensions so rapidly that soon it will only be the public sector that offers them, which is one reason why graduates in Scotland are shunning the private sector.
As far as the collapse of personal pensions is concerned, this again was largely a result of factors outwith the Chancellor’s control. A decade ago a #100,000 fund would have yielded a pension of #9,000 a year; today you would be lucky to get half that. But this is largely because people are living longer and because the private pension funds never fully recovered from the 2000 stock market crash.
The main reason they never recovered was the high commissions charged by the insurance companies that sold them in the 1980s and 90s. Back then, it was not unusual for 30% of the annual premiums paid into a personal pension to be taken out in charges in the first three years. This was the infamous system of “front-loading” commissions.
Like endowent mortgages, with-profit funds and other financial “products”, personal pensions gave very poor value. They promised unrealistic long term returns of 9 or 10% which assumed that share prices would never go down.
But this was the roaring 90s, and with the FTSE rising 10-20% a year, hefty commissions appeared justified. It was only after the stock market collapse of 2000-03 that companies and individuals noticed that their pensions had been underfunded all along.
Brown was a victim of the bull market just like everyone else. In 1997 he calculated that the big pension funds could live with losing dividend tax relief. Most were rolling in cash, and many large companies were awarding themselves pension contribution “holidays”. Until the roof fell in.
Since then, the financial services industry and impoverished pensioners have been looking for someone to blame. The Chancellor’s face fits and he certainly contributed to the problem by withdrawing 5 billion in annual dividend tax reliefs.
But it’s not clear that it would have made very much difference had the money stayed put. It was the ‘irrational exuberance” of the financial services industry that destroyed the credibility of pensions. As a result, millions face poverty in retirement and two thirds of of people in work now are not saving enough for the future.
The Tory party call for an inquiry into the so-called pensions tax is disingenuous. They were themselves largely responsible for the encouraging growth of private pensons through thatcherite policies in the 1980s. They have no real answer to the pension crisis.
Most middle-aged people today are looking to their houses to provide their pensions. Hardly surprising since in the decade of disaster for pensions, house prices have tripled. People have piled into bricks and mortar in the belief that house prices always go up. They don’t of course, and there will have to be a reckoning at some stage.
This is where the Chancellor’s culpability becomes much more apparent. By allowing the housing market to get completely out of control, the Chancellor has stored up the mother of all problems for the future.
Yes, it is the independent Bank of England that set the low interest rates that have pumped up the housing bubble. But the Bank is only charged with keeping inflation under control, and the measure of inflation that it uses, the consumer price index, excludes housing costs from the inflation figures.
This means that interest rates are lower than they would have been had the old retail price index been the Banks guiding star.
Brown’s response to the affordability crisis has been to subsidise private sales rather than build more houses. The effect of government shared equity schemes like homeshare has been to push prices up even higher.
The question now is where we go from here. The Turner Report called for the government to set up a national pensions saving scheme, but the problem as always is getting private financial serviecs industry to run it. Lord Turner said should the pension providers should only be allowed to charge a maximum of 0.3% per annum, but the pensions industry won’t move until they get more. They killed off stakeholder pensions, which charged a maximum of 1%, by simply not telling their clients about them
With a rapidly ageing population, pensions is one of the great issues of the age, and one which will dominate Gordon Brown’s era as prime minister. Very soon, those under-funded pensioners are going to be throwing themselves on the mercy of the state.
Brown has been damaged politically, even though he was only a part of the problem. if he doesn’t do something to restore saving in this country and make pensions worth investing in, then he really will be guilty of impoverishing a generation now in work.