Forcing final salary pension schemes to provide guaranteed pension increases costs around £1 billion a year more than Prime Minister Gordon Brown’s infamous tax raid, according to Watson Wyatt senior consultant Stephen Yeo.
Speaking at the National Association of Pension Funds seminar on the deregulatory review of private pensions, Yeo described the requirement for defined benefit pension schemes to provide pensions that are guaranteed to increase in line with inflation as doing more harm to pensions than Gordon Brown’s tax on pension fund dividends of 1997.
Yeo said: “In defined contribution schemes, people reaching retirement are able to choose whether to use their pension pot to buy a pension that increases in line with inflation, or a higher pension that remains level for life.
“The vast majority opt for the level pension because the cost of providing pension increases exceeds their perceived value. Forcing defined benefit schemes to provide pension increases requires them to use scarce resources to support benefits whose cost exceeds their value. In effect this is like a tax amounting to around £3 billion a year.
“Over the years we have heard a great deal about the effect of Gordon Brown’s tax on pension fund dividends, which is widely reported as costing all forms of pension around £5 billion a year. In fact, the impact on private sector defined benefit schemes is only around £2 billion a year. This is less than the money wasted, in the members’ eyes, on pension increases. Forcing defined benefit pension schemes to provide guaranteed pension increases therefore does more harm to pension provision than Gordon Brown’s infamous tax.
“Faced with extra costs, such as the tax and the burden of pension increases, it is no surprise that defined benefit pension provision has been in retreat. It is a shame that the authors of the deregulatory review could not agree about the need to lessen these burdens.”