If you are geeky enough to read the documents released yesterday it is clear that officials outlines a range of possible impacts, and a range of potential costs. For example at one point it is said that a possible result would be a major fall in the stockmarket. This has clearly not occured. At the other extreme the possibility is also raised that institutional investors would simply push for higher dividends and as such the impact might be limited. Throughout the documents the officials repeatedly state that the outcomes are uncertain.
However juding from some of the coverage today one could be forgiven for thinking that Brown was clearly told that the tax change would destroy final salary schemes, and given clear figures on how much it would cost. For example here's the introduction from the Telegraph's coverage today.
Gordon Brown was warned explicitly that he would cause the death of the final salary pension scheme and cost companies and individuals billions of pounds when he took the knife to the pension system in his first Budget.
Confidential documents sent to the Chancellor before he axed the dividend tax credit in 1997 also warned that the worst-hit victims would be the poorest members of society.
The internal Treasury forecasts, released last night under the Freedom of Information Act, state that the changes would "cause a shortfall in existing assets of up to £75 billion" and that "employers would have to contribute about an extra £10 billion a year for the next 10 to 15 years to get pension scheme funding back on track".
Got that? £10bn a year, according to the Telegraph.
Now here's the intro from the FT's (no less critical) report.
In confidential memos dating from 1997 and published on the Treasury’s website on Friday night in response to a freedom of information request, the officials are shown warning Mr Brown that the loss of tax credits would cost providers about £4bn a year.So that's £4bn a year, or maybe £3.3bn a year (closer to the figure suggested by the Pensions Policy Institiute research I posted previously). In fact if you want to you can find even lower figures in the papers released. And those are just projections, even now there is no agreement on what the cost actually is. In both cases - the projections and the actual costs - the Telegraph simply grasps for the highest possible number.
Though officials said a planned cut in the main corporation tax rate would reduce the effect of this to about £3.3bn, they warned that employee benefits might be reduced and that the shift towards defined contribution schemes could accelerate, with few new defined benefit – or final salary – schemes set up.
I'm not just going to whinge about the numbers used. What about the claim that it caused the 'death' of the final salary scheme? No-one, as far as I am aware, is claiming that the change didn't cost pension schemes money. And of course any increase in costs is going to add to the pressure on employers. However I think that the impact of the tax changes is a minor factor compared to other factors such as the stockmarket correction, the disclosure of pension deficits on company balance sheets and, obviously, increased longevity.
The Telegraph says that far less defined benefit schemes are open now than when the tax credit was abolished. That's true, but it's that old question of confusing correlation and causation. DB schemes have been in long term decline (in terms of membership) for probably 20 years. That didn't really start accelerating until the stockmarket correction, which reinforces the perception that the tax credit abolition didn't have much of an impact.
And talking from my own experience, in the time I was a trustee of a DB scheme it never came up as an issue. The major pressures related to the liability side of the equation. So I just don't buy it.
Finally, one interesting insight from the documents released is a hint of officials' views of the pensions industry.
“The industry will publicly paint a much bleaker picture, and ministers will have to be prepared for lots of outcry.”
“I would expect the industry to try and persuade large numbers of employees and pensioners to write and complain, so ministers’ postbags will be pretty full.”
And the rest! If I remember rightly the NAPF described the tax change as the biggest attack on pension schemes since the Second World War.