It's not the economy, stupid. It's pensions

GORDON Brown basks in his reputation as a fine steward of the national economy. But I fear that history will judge his legacy on pensions far more harshly.

The past week has thrown up yet more evidence that the pensions crisis has gone well beyond being a problem for a handful of employees.

About 40,000 British workers at engineering group Turner & Newall and its American parent Federal-Mogul have discovered the painful consequence of their company being put into administration - their pension fund has been frozen. The deficit of about £800m is so large that it makes a mockery of the £400m the Government plans to put aside for collapsed retirement schemes.

But it is becoming clear that only the best of companies will tackle the astounding £60bn collective deficit. The rest appear happy to put their heads in the sand and hope to be rescued by a rally in the stock market, a tactic that looks even more daft with the FTSE 100 index this week hitting its lowest level so far this year.

Yes, the likes of Glaxo-SmithKline, BP and Marks & Spencer have tried to make good at least part of the debts they owe to their pension funds.

But last year, even though total contributions increased to £11.8bn, only £1bn was wiped off the combined deficit after interest payments and the cost of honouring new pension promises, according to pensions consultant John Ralfe in a report for investment bank RBC Capital Markets.

Over the next three years, the black hole will shrink as more big companies inject funds and others move further into bonds from shares. But this switch will depress share prices, making life even more uncomfortable for weaker schemes.

And it will tend to concentrate the problem on a few large companies, such as ICI, British Airways and Invensys, where the costs of a ballooning deficit already appear unmanageable.

Pension funds were not only badly holed by Brown's ill-conceived raid on £5 billion-a-year of dividend tax credits, but their attempts to keep afloat are being strangled by red tape and new solvency rules that trigger massive sales of equities, so driving the market lower and compounding the problems.

Once again we have been reminded of the virtual tax-free ride that the subsidiaries of overseas companies are able to enjoy in the UK.

According to an investigation by the Financial Times, the 20 largest foreign companies, with UK sales totalling £96bn, paid just £349m in tax in 2002-2003.

Supermarket group Asda now pays less tax to the Exchequer after being taken over by the American giant Wal-Mart, even though profits have soared. Companies such as Nissan and Honda appear to have accumulated tax-credits -usually notched up against operating losses - despite phenomenal successes. And massively profitable investment banks such as Goldman Sachs also find themselves owed money by the Inland Revenue.

'Ah,' these companies argue, 'our highly remunerated employees pay lots of tax.'

Well some might, but many shelter under the non-domiciled resident rules, which mean they pay even less tax here than their employers.

It has been argued that removing this tax break could have a nasty impact. For example, Greek shipowners who have given such a boost to the City's maritime businesses might decamp with the loss of thousands of jobs and millions of pounds of annual revenues.

But that does not excuse practices such as transfer pricing - charging less than the going rate to a sister company abroad to book profits in a more favourable tax regime.

Nor should it mean that investment bankers earning six or seven figures who choose to work in London and enjoy all its benefits should fail to contribute to our national coffers in return.

An abyss for bidders

THE end of takeover talks between WH Smith and Permira late last week saw shares in the retailer fall to 290p. That is 85p a share less that Permira had initially said it would offer, and within a couple of pence of the £215m pension fund deficit that was at the centre of the falling out. It highlights again, as Philip Green also found to his cost, that pension deficits could put paid to highly leveraged takeover bids.

Some companies - and who's to say Marks & Spencer is not now among them? - may become practically bid-proof.