Brown must avert pensions horror

THE full horror of the crisis facing millions of people who were looking forward to a comfortable retirement is being laid bare at the annual gathering of the pensions industry in Brighton.

In a sharp break with the recent past, leaders of the £750bn National Association of Pension Funds (NAPF) are issuing a stark wake-up call to the Government.

If it does not start to take the impending catastrophe in private pensions more seriously then the whole problem could rebound on the Exchequer, which will end up paying the bill. Gordon Brown and the Treasury should be listening closely.

The NAPF is a non-political organisation, made up of pensions experts and actuaries, which in the past has eschewed loud public criticism of successive governments.

The decision of its chairman Peter Thompson to join the debate over pensions with such vehement criticism is a startling indication of how serious the hole in savings and pensions provision has become.

The Government has sought to play down the wholesale retreat from final salary pensions, which for most of the post-World War II era has offered security to up to half the working population.

But the retreat from final salary pensions - the Rolls-Royce of retirement schemes - is reaching a frightening pace.

Only yesterday supermarket group Safeway revealed it was closing its advantageous final salary scheme to new employees because of 'the rising cost of schemes as people live longer and because of lower investment returns'.

The Norwich Union survey prepared for delegates in Brighton shows that one in ten companies will abandon final salary plans in the next two years, joining groups as large and influential as Marks & Spencer and Abbey National.

Many companies are simply using the device of switching pension plans from final salary schemes (which pay a substantial proportion of salary on retirement) to more flexible money purchase plans as a means of cutting back on employer contributions.

The collapse in the final salary, or defined benefit pension, must be partly laid at the door of successive governments. The Conservatives encouraged people who had been missold private pension plans back into occupational schemes, which was in effect a tax of £15bn or more on occupational pensions.

But Gordon Brown and New Labour went further. The decision in its first Budget to remove tax benefits on the payment of company share dividends to pension funds raised £5bn a year in income for the Government.

Calculations by free market economist Professor Patrick Minford, of Liverpool University (a former Treasury adviser) show that when this tax figure is adjusted for inflation and growth in the economy the actual cost to occupational pension funds could be as high as £250bn.

Minford describes it as a 'vengeful stealth tax'.

On top of this penalty companies are also being required by accounting rules to fully disclose rising pension fund liabilities in their annual profit statements.

This forced disclosure to shareholders of potential costs is among the key factors frightening big firms into switching out of final salary schemes, which can cost up to 20% of total wage bills.

The combined effects of the switch from final salary pensionsan ill-drawn stakeholder-pension scheme and the introduction of the minimum income guarantee for state pensions, is to undermine the whole system of private pensions provision.

As a result, NAPF chief Mr Thompson believes that unless government urgently addresses the problem people will face 'a long, healthy and poor retirement' with the burden falling back on the state.

Until the mistakes of the last few years Britain had the best funded system of occupational pensions in the world and was the envy of our Continental partners.

In response to the crisis, the Chancellor announced in last month's Budget that he had asked former NAPF boss Alan Pickering to look at ways of simplifying the regulatory and tax regime for private pensions.

In the meantime, pensions experts are voting with their feet by abandoning final salary schemes.

Most managers are fully aware that once government has imposed swingeing new taxation it almost never pulls back unless there is a massive public backlash.

Unfortunately, pensions are so little understood by the public that there is very little chance of that happening. As a result we all face a worsening savings climate and a more frugal and later retirement than we were promised.