Opinion: Tackling Labour’s Pensions Deficit

The Coalition Government is currently coming under fire for cutting public sector pensions, but the truth is that pensions funding was cut 13 years ago by Gordon Brown when he launched his raid on pension schemes.

Until the last Labour Government came into office the accrual of interest on pension funds was not taxed — pension schemes could build up funds more quickly than other modes of investment in order to pay out benefits when members retired. Labour changed that and taxed interest on pension investments as it accrued; pension schemes which had aimed at paying out a defined benefit for each year of membership were no longer able to meet that commitment.

The private sector recognised this and largely moved away from providing defined benefits schemes. For 13 years, however, Labour lied to our doctors, nurses, police officers, council employees and other civil servants about the benefits accruing towards their retirement.

Just as bad, though, is the impact that that policy has had on our economy. Labour’s pension fund raids reduced the amount of money available in pension funds for investment in British business and industry; the economy is suffering as a direct result of Labour’s pension folly.

Liberal Democrats believe that tax should be progressive, fair and be socially aware; we should seek to re-establish the ability of employers to contribute equitably to the retirement benefits of their employees.

Serious consideration should be given to reversing Labour’s raid on the funds accruing to pay pensions to low and average paid workers to encourage saving for retirement, and to achieve this we should:

    1. Re-establish the maximum pension payable from all sources at one-sixtieth of career average earnings (accelerated in line with CPI) regardless of whether the pension scheme is defined benefits or money purchase in its nature.

    2. Re-establish the principle that all contributions aimed at providing pension benefits up to and including the national average wage are treated as deferred pay both in terms of not being taxed on the contribution or the accrual of investment income, the tax being instead payable on the pension in payment.

    3. Retain the principle that all contributions aimed at providing pension benefits above the national average wage are to be treated as deferred pay in terms of the contribution being made, but with investment tax being charged on the accrual of investment income.

    4. Once the annuity to pay a pension has been purchased, any funds left over should be either offset against contributions to the pensions provision for other staff, or taxed on both contributions and investment and the repaid to the contributor (the pensioner or company as appropriate).

True this is not a fiscally neutral proposal, but this proposal would go some way towards alleviating the Labour’s pension deficit, target tax relief on pensions to the poorest paid and get back to a simple tax principle for pensions that everyone can understand.

It would also mean Government could offer a fairer pensions deal to both public and private sector workers.

* Iain Donaldson is a Liberal Democrat campaigner from Manchester. He was a City Councillor for 19 years until May 2011, and has served on the NW Regional Exectutive and the English Council.

* Chair of Manchester Gorton Liberal Democrats, a member of the NW Regional Executive and the English Council and Vice President of LGBT+ Liberal Democrats

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6 Comments

  • This scheme offer a huge tax break to very rich people. I cannot see why we would want to do this. Offering tax relief at 50% to someone earning £200k a year does not make sense.

  • The reason GB taxed the income from dividends was because at the time the stock market was booming and many defined benefit providers had taken contribution holidays (something Maggie Thatcher allowed to happen) The reason why so many defined benefit schemes have closed has many causes and to blame it all on GB is absurd and shows a lack of understanding of what happened. It may be one reason but there are many others. Two stand out. 1.The lack of real growth in the UK and US stock markets since 2000 and 2.The further global development of the marketplace meaning obligations to workers have decreased as CEO need to push higher shareholder return through income and pension contributions are seen as an unnecessary cost when productions can be moved oversees at the drop of a hat. Many companies that had defined benefit schemes and closed them retain healthy profits and could easily afford to provide a defined benefit scheme (just look at the most recent case of Unilever)
    The creation of the pension lifeboat for defined schemes which requires a levy to be paid has also had an impact as has life expectancy and the gradual reduction in manufacturing in the UK (manufacturing companies often had defined schemes).
    If GB raid on pensions was so bad why did neither opposition party going into 2010 pledge to end it?

  • Richard Boyd 9th Jan '12 - 12:30pm

    A voice from yesteday’s man.

    It may now be sorted, but I recall in the 1990’s when we faced two FBU strikes in Essex, the unfunded pension for
    firefighters had reached a stage that almost 16% of our annunal fiire precept would be consumed by paying for retired firefighters. As time would go on, and life expectancy increased, we calculated that within 20 years almost a third
    of the budget would be paying for retired firefighters (many of whom retired in their 50’s with a life expectancy of a
    futher 30 years). Given that the Government will continue to freeze precepts and council tax, can someone reassure
    me that this has been sorted out?

  • Alex Sabine 9th Jan '12 - 1:55pm

    Dessie rightly points out that there are several factors behind the demise of private sector pension schemes, and the complexity of this subject makes it hard to separate them out and to identify causal relationships – but Brown’s 1997 tax raid was clearly a significant change.

    There was a theoretical case for the reform, in terms of equalising the tax treatment of dividend income and capital gains for institutional investors.

    But rather than being justified in these terms and forming part of a balanced package of reforms, it was just a handy way of Brown netting many billions of pounds a year through a stealthy tax rise that few people would understand at the time it was announced.

    While it hit both defined contribution and defined benefit schemes alike, it did highlight the difference between the two types of schemes.

    Employers in defined benefit (eg final salary) schemes could respond to the need to make more contributions either by paying up or by reducing the availability of and ultimately closing such schemes.

    Where personal savers were offered only defined contribution schemes, their typical response was to save less, cutting their charges but reducing their returns as well.

    Dessie asks: “If GB raid on pensions was so bad why did neither opposition party going into 2010 pledge to end it?”

    Because reversing it would cost the Treasury about £8 billion per year, and the Brown government left a £150bn deficit…

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