Newspaper article The Evening Standard (London, England)

The Pension Disater Culprit

Newspaper article The Evening Standard (London, England)

The Pension Disater Culprit

Article excerpt

HAROLD Wilson, the former Labour Prime Minister, was known to say that the greatest social revolution of his lifetime was the rise of the occupational pension linked to final salary. It lifted the spectre of poverty in old age from a significant slice of the population and did more for the people of Britain than any social engineering attempted by governments he headed in the 1960s and 1970s.

All the more ironic, therefore, that it should be the actions of a Labour Chancellor that have played a substantial part in creating an environment in which final-salary schemes are struggling to survive. In a classic example of the law of unintended consequences, it was Chancellor Gordon Brown's decision five years ago to tax the dividend income of pension funds which sowed the seeds of their demise.

Few realised at the time what is now apparent: the pound sterling5 billion annual sum taken is itself significant, but it is the compounding effect year in, year out that does the ultimate damage. When projected over the 30-year life of a pension fund, it can make the difference between a sponsoring company being willing and able to keep it open or being forced through cost and risk to close it.

The grab also had a significant effect on the likes and dislikes of investing institutions and changed their preferences in a way that did more damage. Once dividends were taxed it encouraged companies to buy back their own shares instead of making conventional dividend payments. In theory it should make no difference to the performance of a fund because the fewer shares in issue should rise proportionately faster. In practice it has not worked like that. The income flowing into the fund is cut.

Moreover, it has made companies far more willing to take the axe to their formerly sacrosanct dividends and not do the buyback cutting income even more.

Income is the key to a successful pension fund because if enough money flows in through the window in the form of dividends you can shovel it out through the door to meet the demands of current pensioners and it does not matter too much what happens in the short term to the value of the stock-market investments. …

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