Chancellor Gordon Brown’s £5bn a year pension raid has finally come back to haunt him with the revelation that he ignored repeated warnings from his own officials about the long-term damage it would have on savings.
Money Marketing revealed last June that following a Freedom of Information Act request, the Treasury had been ordered by the Information Commissioner to reveal estimates given to ministers on the long-term damage on pensions funds caused by the removal of advance corporation tax relief on dividends for pension schemes in 1997.
The Treasury appealed against the decision but lost its fight to suppress the information and published the papers unannounced on its website last Friday. The papers show that officials clearly told Brown that the raid “would make a big hole in pension scheme finances”, that the value of existing pension funds could plummet immediately by £50bn and that lower-paid workers would be worst-hit.
The papers also show there were warnings of creating a potential £75bn shortfall, with employers having to contribute an extra £10bn a year for the next 10 to 15 years to get pension scheme funding back on track.
The revelations come as the Chancellor’s leadership bid reaches critical point, with the Tories calling for an independent inquiry into the policy decision.
The Treasury defends the policy decision as a response to calls from companies 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. These claims have been rejected by the Confederation of British industry. The Treasury also blames declines in the stockmarkets and increased longevity.
But pension consultant Ros Altmann says: “The Chancellor did not understand or care that taking so much money out of pension funds would damage the incomes of those saving dutifully for their retirement, as the Government has always encouraged them to do.”
– Changes could cause a shortfall of existing assets of up to £75bn
– Employers might have to contribute an extra £10bn a year for the next 10 to 15 years to get pension scheme funding back on track
– The value of existing pension funds could plummet immediately by £50bn
– Shares could drop by between 6 per cent and 20 per cent
– Loss of tax credits would cost pension providers about £4bn a year
– Pension benefits might be reduced
– Shift towards defined-contribution schemes might accelerate
– Department for Trade and Industry is likely to be “gravely concerned” about company insolvencies
– Lower-paid would be worse off under new rules
– Everyone in money-purchase schemes is a “potential loser” as employers will not make good the shortfall
– Members of orphan schemes could be particularly severely affected
– Switch from equities to other assets such as foreign equities, gilts or property