A decade ago, while working for a national newspaper, I forced the then Labour government to release documents under the Freedom of Information Act. The papers showed that Gordon Brown defied repeated warnings from his own officials about the potentially devastating impact of this £5 billion-a-year raid on pension funds and went ahead with it regardless.
Brown announced the scrapping of tax relief on dividends paid into pension funds in his first Budget in 1997 at a time when many funds were in surplus. It was the single biggest change to the system in a generation. By the time my story was published, the country’s savers had been deprived of at least £100 billion.
It was one of those stories which, in journalism parlance, ‘has legs’. The fallout continued for weeks with the Labour government blaming the CBI, the CBI hitting back saying that was nonsense, the then Shadow Chancellor George Osborne calling for Gordon Brown’s resignation and saying he should be blocked from becoming Prime Minister. Everyone weighed in.
Ten years later and the fallout continues. Pension funds are in trouble. Last year, UK businesses spent around £24 billion trying to plug their pension funds’ deficit, with Royal Bank of Scotland, BT, Tesco, Shell and Unilever among the companies ploughing funds into the schemes. This is £19 billion more than would have been the case if pre-2000 deficit levels had continued, and the current deficit of all defined benefit schemes is thought to amount to approximately £500 billion.
That’s according to the Resolution Foundation. The new research, carried out by Brian Bell at King’s College London, also found that an average 10 per cent of the money that has been paid into defined benefit schemes over the past 16 years has been funded by suppressing wages. That’s equivalent to nearly £2 billion.
I’m not suggesting that Gordon Brown holds sole responsibility for the state of our pension funds; there are are a myriad of other factors at play here, not least historically low interest rates, poor investment returns, ongoing government tinkering with the system, and an ageing population. But this new data showing the effect of filling pension deficits with the workforce’s take-home pay is devastating.
The Resolution Foundation, a think tank, calculates that, on average, workers are paid £200 a year, or 0.6 per cent, less than employees in similar companies which have not had to plug pension deficits.
Of the 6,000 defined benefit schemes still in existence, half are closed to new members and a further third are closed to new contributions. And these are the generous, gold-plated pensions that guarantee a healthy pension, compared to defined contribution where the risk is all on the employee and subject to the vagaries of the market at the time of the individual’s retirement.
And what do you know? It’s older workers, and those already in retirement, who have the most to gain when companies top up their pension funds. In addition, the impact has been most severe on current and former members of defined benefit schemes, as well as low earners who may not even be entitled to a share of the pension pots they are funding.
Throw into the mix an overall slowdown in pay growth (average earnings are still £16 a week below their pre-crisis peak and prospects for a return to strong pay growth look shaky) and the news that companies are dipping into workers’ wages to fund pension schemes is piling on the pain.
And there’s this to chew on: research released a couple of years ago revealed that Labour’s raid on pensions in 1997 now costs taxpayers nearly £10 billion a year. There seems little doubt that the former Prime Minister played a starring role in the collapse of final salary pensions in this country.
Helen Nugent is Online Money Editor of The Spectator