Tax relief on pension contributions

There's a bit of speculation that Alistair Darling may use the forthcoming Budget to play about with the tax relief on pension contributions. Currently tax relief applies in bands, meaning that high-rate taxpayers get more bang for their buck of pension saving than lower rate taxpayers.

This is quite an interesting issue as it gets at the question of whether tax incentives actually work to boost savings. This is something we had a look at when I was at the TUC, and were pretty sceptical of the impact of incentives on saving. But before I'm accused of bias, let me point you in the direction of the Pensions Policy Institute report (PDF) on this subject. Here are their conclusions:

• There is no evidence that tax incentives increase the overall level of saving. They are complex, do not appeal to their target group, and do not solve the basic problem for most low income people; that they do not have the money to save.
• Tax incentives can encourage pension rather than other types of saving.
• But tax incentives appear not to have been effective in generating enough pension saving for future pensioners.
All taxpayers pay for the tax incentive system, but it benefits higher earners most:
• Tax relief is often described as tax deferral, but there is also an element of tax advantage.
• Most tax relief is paid to higher (male) earners.
• Almost £20 billion a year of tax revenue is foregone each year due to tax relief on pension contributions. After taking account of other pension tax advantages and the tax paid on private pensions in payment, the net annual cost to the taxpayer is more than £19 billion (1.8% of GDP). This is significant, being 25% of the cost of state pensions and retirement benefits.
• The proposed tax simplification is likely to increase the cost of tax relief on private pensions.

Not much equivocation there really. So there is a good case in theory for at least tweaking tax relief - what about a standard band for all savers? The ABI claims that getting rid of higher rate relief would be "a direct attack on the hard-working people of middle Britain", but how many people are in that box, less than 1 in 5 and falling. This isn't Middle Britain, it's well-off Britain and it's dishonest to claim otherwise.

To be honest I could see tax relief being phased out altogether in the future. As of 2012, with the introduction of Personal Accounts, we'll have a quasi-compulsory pension scheme in any case. So why will we need incentives (which don't work very well) to get people to save? We could spend the money better elsewhere. If we really want to spend smart on pensions, rather than overly-reward the already well-off, why not phase out tax relief and use the savings to increase the state pension? Just a thought, like.

Hang on a second… more on voting disclosure

Last week I had a rant about voting disclosure. As I said I have an interest in this as I have been pushing this issue for several years. Today two things struck me:

1. In June 2007 the Institutional Shareholders Committee (ISC) issued this guidance (PDF), stating that investors should either comply (make voting disclosures of one form another) or explain why not. I found lots of fund managers that did not disclose, but can’t think of any that ‘explain’ why not. The guidance is nearly 2 years old now, so plenty of time for managers to put even a boilerplate statement on their website. They don’t bother.

2. Look at the last page of the ISC’s press release (PDF) on the disclosure guidance. Ed Balls asked them to produce a report on its effectiveness in Autumn 2008, and annual statistics on compliance. I can’t see anything on the ISC website and I’m not aware of anything being produced - and I know this area pretty well. It looks like they didn’t do anything.

As I wrote last week, I think we can safely conclude that the voluntary regime has failed. Fund managers who don’t disclose don’t follow the ISC’s guidance and explain why, the ISC doesn’t seem to have fulfilled its part of the deal by producing a report or statistics, and, most importantly, the net result is that you still can’t get good data on fund manager voting at the banks.

Fund managers have been given plenty of time to address this issue, and they’ve repeatedly dragged their feet. Let’s use that reserve power…

Friday's bits n bobs

Not much blogging time today, so here's a few links.

1. an oldie that I should have spotted - ITUC and ICEM support for a shareholder proposal at Chevron.

2. Change To Win is running a vote no campaign against Bank of America directors.

3. BP's AGM yesterday - Sutherland was easily re-elected but the remuneration report saw a big vote against. There's a bit of speculation as a result that shareholders are getting tougher on pay.

AFL-CIO Executive Paywatch

Hat-tip to CorpGov.net, the AFL-CIO has released preliminary figures from its annual PayWatch research:

A chief executive officer of a Standard & Poor's 500 company was paid, on average, $10.4 million in total compensation in 2008, according to preliminary data from The Corporate Library.
Excessive executive compensation has taken center stage since the government bailout of banks that began in September 2008. Americans have expressed outrage as CEOs and other executives responsible for the financial crisis have pocketed millions of dollars from bonuses and golden parachutes. CEO perks alone grew in 2008 to an average of $336,248—or nine times the median salary of a full-time worker. Meanwhile, the economy tanked for working people while many companies were bailed out with more than $700 billion in taxpayer money, as well as low-interest loans and guarantees.

Jeff Randall fact check

Just spotted the Alan Sugar mini-me's column on pensions. It contains several of his usual bits of wobbly pen. Just a few I spotted straight away -

Claim: "And then there was Mr Brown's disgraceful tax raid on pension funds' dividends. Most independent advisers agree that this measure, introduced soon after he was given the keys to Number 11, has cost British pensioners at least £100 billion."

Fact: Actually the most commonly quoted figure is that it cost £5bn a year, which would put it at £60bn. The estimate of £100bn comes from an actuary called Terry Arthur who has a political slant (I'm not saying his estimate is wrong, just that I wouldn't consider him 'independent'). The genuinely independent Pension Policy Institute came out with a much lower figure of about £3.5bn a year (PDF), or £42bn to date, though they said it could be lower at £2.5bn a year (£30bn).

Claim: "the final-salary pensions of state workers whose schemes are largely unfunded – ie, their assets are insufficient to meet expected liabilities."

Fact: Not really. Unfunded schemes don't have assets. 'Unfunded' in terms of the type of scheme basically means you don't build up assets in a fund to pay benefits, so it refers to PAYG schemes. He's obviously aware that some public sector pensions are 'funded' because he says 'largely unfunded', but he's misunderstood what this means. The LGPS is a 'funded' scheme, because it has assets, but they currently don't meet its liabilities. Loads of private sector schemes are 'funded' and have the same problem. That means such schemes are underfunded, which is what he thinks he means when he says 'unfunded'. But because he doesn't actually know what the terms means he effectively talks gibberish. This is pretty basic pensions terminology (see page 106 (PDF)).

Claim: "The MPs' scheme is among the most lavish ever devised."

Fact: It's certainly very generous. But it doesn't come close to those provided for directors of the UK's biggest companies.

Interesting argument

Falkenblog reports on a talk by Robert Merton:

everyone castigates the markets for creating really complex instruments like derivatives, such as credit default swaps and mortgage backed securities. But, compare these assets to the assets and liabilities within a company: goodwill, deferred tax expense, intangibles, patents. Who can value these from first principles? Further, the company has the ability to change its business mix at any time, creating new products. We happily trade equities of these companies, and these are residual claims on this pyramid of assets and liabilities. Thus, the complexity of a mortgage-backed security of any sort is actually quite modest in that context.

Quite a good point, innit?

In defence of shorting

The argument in favour of shorting put by Going Private's successor blog Finem Respice.