Budget piles pressure on pensions

THE retirement dreams of millions could be hit by Gordon Brown's decision to raise National Insurance by 1%, it has emerged. The Chancellor's Budget move will cost firms an extra £4bn a year - and up to a third of Britain's biggest companies are considering slashing pension costs to meet the bill.

It raises the prospect of firms closing their schemes and moving staff to cheaper, riskier retirement plans. Alternatively, bosses could reduce contributions made on behalf of staff and ask workers to save more themselves. Some may stop offering pensions entirely.

Many firms are closing schemes as they are becoming too costly as staff live longer, retire earlier and stock market investments fall.

The research, from Norwich Union, suggests the National Insurance rise will undermine Ministers' efforts to reduce the burden on the State by increasing the number of people in company schemes. The findings will add to the deepening pension crisis as companies stop offering more attractive schemes.

It is the second time the Chancellor has hit company pensions since Labour came to power. In 1997 his tax raid on pension funds cost £5bn a year.

Before last week's Budget, Norwich Union asked 1,000 firms how their financial commitment to pensions would change if taxes such as National Insurance rose. In the Budget the Chancellor said employers would pay National Insurance at 12.8% from next April - up from 11.8% - on staff earnings above £4,615.

Norwich Union found that a fifth of the firms surveyed were likely to cut pension costs. One in seven medium-sized firms said they might scale back their commitment, while one in seven small firms may do the same. And 30% of large firms were also considering cutting back.

Traditionally, most staff have been guaranteed pensions based on their final salary - typically two-thirds of their wages when they retire. Many firms have begun to close their final-salary pensions to new savers. Experts blame the crisis partly on Brown's tax raid on pension funds in 1997.

Iain Oliver, head of corporate pensions at Norwich Union, said: 'The rise in National Insurance is bad news for many workers relying on their company to provide a pension.'

Tory pensions spokesman David Willetts said: 'Gordon Brown does not realise that if he keeps adding to the cost of running a business then firms will cut back on pensions.'

Peter Thompson, chairman of the National Association of Pension Funds, warned: 'The Government forgets that these companies provide pensions voluntarily. This survey seems to suggest that companies will make up the added costs by cutting back on pension costs.'

Business leaders say the hike in National Insurance will eat into profits, damage competitiveness and threaten millions of jobs.

John Cridland, deputy director general of the Confederation of British Industry, said: 'Employers will now find that the extra money they were having to find for their pension schemes is being siphoned off to pay for National Insurance increases.'

Accountant PricewaterhouseCoopers estimates that business will pick up 87% of the £8.6bn a year extra taxes imposed by Brown since 1997. Industry will pay £6bn of the £7.6bn rise announced last week.