Comments: Polly and pensions

Hi David

Errmmm, I see you are starting to agree with me about the current state of UK jounos.

Kon ;)

Posted by kingofnowhere at April 3, 2007 08:51 PM

Polly will never have to worry about her pension, having inherited wealth and being paid to be a champion of the poor for the Guardian. What a shame that her policies only condem the poor to more poverty.

One thing that has annoyed me about this debate has been how all the focus has been on pensions. When GB "reformed" the tax in question he also removed the right of PEPs (Personal Equity Plans) to generate dividends from shares tax-free replacing them with Equity ISAs which are, in reality, 100% taxed thus making them no different to saving directly in shares.

GB will be known as the man who destroyed Britain's pensions.

Posted by Ash at April 4, 2007 06:32 AM

Only some journalists .... I think it was on the eve of the last assessment of euro entry by the Treasury in 2003 and the BBC ran a Sunday evening Panorama debate. Polly claimed, twice, that German unemployment had fallen since the launch of the euro in 1999. At the time, German unemployment was on its way up to its highest level since the 1930s.

Posted by David Smith at April 4, 2007 10:29 AM

Hi David

OK, only some, there are a few that I make a point to read their mutterings. Some I even buy the newspaper for.

The funniest one recently was the daily express, they said, "house prices to surge, as people rush to sell ahead of hipps."

Now, I don't want to get to over your head with economics, but a rush to sell doesn't normally produce surging prices. If you are interested, I think it's something called supply and demand. ;)


Posted by Kingofnowhere at April 4, 2007 01:31 PM

Not understanding the issue never stopped some journalists...especially when they sense a higher political purpose.

Having read most of the documents David linked to earlier, and not read Polly's piece, they did read as more 1992 than 1997, and having been hastily updated.

Economics correspondents tend to get a little bit of a biased impression as very few people have PEPs, ISAs or anything of the sort. Most savings are in boring bank accounts and former building societies, and used to be in life insurance. However, large numbers of people were suckered into buying personal pensions when they would have been better off staying in or joining an occupational final salary scheme. This was the first nail in the coffin of the fully funded pension system.

The second was that by following actuarial advice in a bull market pension funds had massive surpluses over actuarial needs estimates - based on historical death or life tables. These surpluses attracted takeover predators and government interest.

The old tax system provided incentives for firms to pay out dividends to their pension scheme (you were allowed to invest in your own company then) and use the surpuses to invest in useful things like a land bank for future company use. Treasury saw this as a straight tax dodge.

While there is a very respectable argument that it is equally efficient for investment funds to be secured either via retaining profits or by paying dividends out to the market and seeking market funding for new investment, the tax system with ACT balanced this in favour of dividends, and the later system in favour of retaining profits. This would be traditional Labour views back to the 60s and earlier.

I think Gordon Brown did make a political mistake, but a different one from the one everyone is quoting. The advice given basically assumed that business would abide by good human resource principles and resume paying into pension funds on the scale and in the way they had done before Lawson, Lamont, and more significantly, corporate predators looking to extract surpluses, had reduced the incentive to run surpluses. However, by this time, much of business was run by a new generation who simply did not see the need. Contribution rates to pensions did not rise, unless forced by contractual obligations. In the event, pension fund deficits became useful poison pills.

Gordon Brown's tax change came about five years too late (not his fault) well after the surpluses had been pared down. The actuarial valuations quoted to him were based on old information and old life tables. Even the Government Actuary's Department advice did not foresee the effects of changing life expectancy on pension funding.

The change might have been indicated earlier - after all Norman Lamont had a go at the tax treatment of pension funds for much the same reasons - and the papers read very much as though they had been prepared for Lamont and updated in a rush. They are, however, the kind of thing that Ken Clarke would just have waved away, despite people in Treasury arguing for this sort of change.

In summary, my view is that the death of the final salary occupational scheme was protracted, and the Treasury were clearly unaware of the extent of the rot in place in 1997, and took another hack at pension privileges, The lot came down finally in the dot-com crash and was prevented from getting back by the guarantees required post-Maxwell. Gordon Brown's raid probably had about as much influence as a walk-on part in Shakespeare.

Business committed to pension funds in a corporatist Basbara castle world when the UK had about the highest proportion of workers in unions in the free world - and when that world changed, pensions fell with it. Arguing over who gave the final push is what we are doing.

Posted by paulbiv at April 4, 2007 09:04 PM

Paulbiv,

It is probably true, as you say, that private sector final salary pensions were doomed. But Brown's tax change didn't only affect final salary schemes - it affected any funded scheme, including money purchase (defined contribution) schemes.

So as well as giving final salary schemes a 'final push' he also penalised the type of pensions open to the self employed and to those employees whose employers closed their final salary schemes. He permanently damaged all funded schemes and private pensions making it much more difficult for anyone (except the public sector) to save for their retirement.

Posted by HJ at April 4, 2007 10:38 PM

HJ - agreed, but remember that his advice was that private pensions were a very small percentage of the population - and many of those were being extricated from miss-selling by the life insurance and pensions industry.

The private pensions were, however, used by a disproportionate amount of the chattering classes - such as freelance journalists. Other defined contribution schemes as promoted by the Tories might easily be seen from a Labour point of view as undesirable - the investment risk should be handled by employers or life insurance rather than by individuals.

Private pensions, although I have one, perforce, are inextricably linked in my mind with the 'loadsamoney' period.

Even today many people when faced with taking up pensions are talked into being bothered about the investment strategy rather than looking at what might be needed to be invested, and how, to deliver the sort of benefit wanted, as perhaps an actuary might look at things.

Posted by paulbiv at April 5, 2007 02:51 PM

Paul,
I hear what you're saying, but I think you are going much too far. Yes, there are plenty of people for whom pensions, Peps and Isas are an unknown area, but there are also plenty of others who are profoundly affected. The NAPF's members cover 10m people in occupational schemes and 5m pensioners. There's overlap but there are many millions with Isas and Peps. I'd say a majority of households have been affected, however marginally, by the removal of the dividend tax credit. Certainly more than a chattering class issue.

Posted by David Smith at April 5, 2007 03:45 PM

David - you are conflating the NAPF with the beneficiaries. The NAPF was and is in the position of criticisng either or all of Gordon Brown, the companies whose employees they provide pensions for, or the actuaries who hadn't updated their life tables enough, to take only those involved in the transformation from surplus to chronic deficit. I have left out the stock market crash although there may be some to blame there on the promotion of the 'weightless' economy story.

Of these possible targets for criticism, Gordon Brown is the softest target and possibly the one who might be persuaded to change, rather than the paymaster employers and the actuaries on whom pension funds depend.

The point about life tables is that you can only know the extent of risk for a pension fund when the beneficiaries have died - everything else is an estimate - and the life expectancy of people who lived through two workl wars and the 30s depression, some of whom are still alive, is likely to be a poor prognosticator of the life expectancy of those born and brought up after the clean air act of the 1950s. The difference between the two groups involves an enormous amount of risk for pension funds especially if retirement age remains constant, or indeed effectively fell as it did in the 1990s.

Posted by paulbiv at April 6, 2007 12:54 PM

No, I wasn't doing that. Merely pointing out that the number of people affected by these changes is very large. I don't disagree that the abolition of the divdend tax credit was only one of a number of factors but I think it probably also gave companies the green light to change their behaviour. Many things could then be blamed on Brown's action.

Posted by David Smith at April 6, 2007 01:04 PM

Sounds like we're not so far apart after all.

The remaining difference is whether companies would have resumed funding pensions voluntarily at pre-pensions holiday levels. My view is that they would not have done so voluntarily, and the absence of union pressure (following other changes) was likely the key to that issue. The civil service advice, including GAD, was clearly that companies would fund prospective liabilities. Gordon Brown talked about many things to many business leaders, who tend to be adept at saying that of course the welfare of employees lies at the heart of good Human resource practice, while doing something quite different. In other words, Gordon Brown's failure was in not understanding the business climate in relation to human resource practice.

David, you seem to be saying that whether or not the above is true, the abolition of ACT signalled to firms that the Government did not stand behind occupational pensions and the employers were therefore free to continue to make pension holidays as long as there was a surplus on the latest triennial valuation - and in the bull market this continued until 2001.

Looks like I'm almost more critical of Gordon Brown - largely for not understanding what Marxists call the 'conjuncture'.

Posted by paulbiv at April 6, 2007 06:32 PM

Paulbiv,

You equate private pensions with money purchase pensions in 1997. In 1997 I was in my employers pension scheme - but it was already a money puchase scheme. These were quite prevalent at the time.

A comparatively small number of people may have had entirely private schemes, but plenty of us had money purchase employer schemes.

Posted by HJ at April 6, 2007 08:58 PM

HJ - I think your point bears on what I was saying about Gordon Brown (and his advice) not understanding that in 1997 many employers were already trying to limit their pensions provision.

Money purchase or defined contribution automatically meant that the employer contribution was lower than it had been in defined benefit schemes before pension holidays - and was fixed. In some cases of course there was either no or very low employer contribution.

I see the employer withdrawal from pension funding as going back well before 1997 - and it only sharpened later after the tax changes, changes to valuations looking at life expectancies and the dot-com crash kicked in. Gordon Brown did not understand that this was the case - and there is nothing I could see in the advice given that this pattern had been identified.

Posted by paulbiv at April 10, 2007 01:57 PM
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