Oh great, yet another scheme - PRS inspections !

[JohnW2]

Such as forcing my final salary pension scheme to close, which has reduced my occupational pension by about 40%?

I'm sorry to hear that, but was it primarily due to "raiding pension pots in a tax grab" or, rather, more generally due to the fact that a combination of inflation and increased life expectancy had resulted in a situation in which the arithmetic of final salary pension schemes simply did not work (i.e. they ceased to be viable) unless we were prepared to make younger (still working) generations pay, directly or indirectly, a fortune in contributions to finance our pensions?

Kind Regards, John

 

[stillp]

It was a combination of factors, including the tax grab, changes in governance rules, and the factors you mentioned, but the biggest influence (according to my group finance director) was the unexpected 'tax grab' and its subsequent effect on the investment market.

 

[JohnW2]

It was a combination of factors, including the tax grab, changes in governance rules, and the factors you mentioned, but the biggest influence (according to my group finance director) was the unexpected 'tax grab' and its subsequent effect on the investment market.

Interesting - but I have to say that I'm a bit surprised.

Don't forget that for many years before anyone dreamed of any 'tax grab', there had been a lot of talk and concern about the fact that final salary pension schemes were becoming non-viable, primarily for the reasons I mentioned.

Kind Regards, John

 

[JohnD]

the biggest influence (according to my group finance director) was the unexpected 'tax grab' and its subsequent effect on the investment market.

If you had a pension scheme worth £100,000 what do you think the removal of the dividend tax credit would typically cost it, per year?

Pick one

£12,500
£1,250
£125
£1

If you had a good-performing pension fund that was worth £100,000 on 1st January 2016, how much do you think it might have gone up, by 21 December 2016? (Disregarding any additional contributions during the year.)

Pick one

£30,000
£20,000
£2,000
£200

 

[stillp]

Don't forget that for many years before anyone dreamed of any 'tax grab', there had been a lot of talk and concern about the fact that final salary pension schemes were becoming non-viable, primarily for the reasons I mentioned.

The scheme had already been restructured to ensure its viability.

 

[JohnD]

All right, I'll tell you then.

If you had a pension fund worth £100,000 then you might have about a quarter of it invested in the UK stock market. A pension fund would tend to be attracted to growth or speculative shares, rather than high income ones, but I've generously assumed that they will have an average dividend (gross) yield of 2.5%.

£100,000 divided by four is £25,000
2.5% of £25,000 is £625 dividends
20% tax on £625 is £125

So your "tax grab" costs £125 a year on your £100,000 pension plan.

Wow, that £125 makes all the difference, doesn't it?


And if you have a good performing £100,000 pension plan then in 2016 it might have gone up by £20,000.
If you'd had the foresight to increase your weighting into International and Far East sectors, you might have gained £30,000.

Wow.

That £125 tax grab makes all the difference, doesn't it?

No.

It's less than the variance due to day of week or time of day.

Don't believe anyone who tells you that "Brown's Tax Grab" made a perceptible difference. It didn't.

 

[stillp]

It didn't.

Perhaps not directly, but what about the effect it had on the stock market? Remember I'm talking about a final salary scheme, not a DC scheme.

 

[JohnD]

what effect do you think it had?

 

[JohnD]

Can you see it?

I can't

 

[JohnD]

Announced in Budget 1 July 1997.

Where's the drop?

 

[JohnW2]

The scheme had already been restructured to ensure its viability.

What does that mean? If one reaches a stage when people's lifetime contributions, and interest thereon, is far too small to provide a 'final salary pension' for as long as they are likely to live, what sort of 'restructuring' can change that arithmetic. As I said before, the only real 'solution' would be to expect our children and grandchildren to subsidise our unrealistically generous pensions.

With any other form of investment/insurance, what one 'gets out' is related to (and limited by) what one 'pays in', since, as far as I can see, that's really the only type of arithmetic which makes sense.

Kind Regards, John

 

[JohnD]

What does that mean?

Imagine the conversation in the boardroom

"Well, chaps, we've had a pretty good year. We've made profits £100million bigger than last year. What shall we do with it? I've had two suggestions. Either we pay it into the workers pension scheme, or we pay an increased dividend to the shareholders, with bonuses for all of us, and greatly increase the value of our director's share options. Can I have a show of hands?"

or alternatively

"Well, chaps, we've had a pretty bad year. Profits are £100million less than last year. What shall we do? I've had two suggestions. Either we put a stop to the workers final salary pension scheme, or we cut the shareholders dividend, which will mean no bonuses for us, and the value of our directors share options will fall. Can I have a show of hands?"

Every million for the workers is a million less for the shareholders. And vice-versa.

BT could wipe out its pension deficit by cutting the dividend. It won't.

 

[stillp]

What does that mean? If one reaches a stage when people's lifetime contributions, and interest thereon, is far too small to provide a 'final salary pension' for as long as they are likely to live, what sort of 'restructuring' can change that arithmetic.

I think you're confusing Defined Benefit and Defined contribution schemes. The accrual rates and contribution bands had been altered such that the actuaries employed by the Trustees for that pension felt there was little risk that the schemes would fail to pay out the expected pensions, given the assumptions made for the performance of the company and of its investments, including those of the pension scheme.

the only real 'solution' would be to expect our children and grandchildren to subsidise our unrealistically generous pensions.

That's the way the state pension works.

 

[stillp]

Where's the drop?

What are those graphs?

 

[JohnD]

ftse100 over time.

http://www.hl.co.uk/shares/stock-market-summary/ftse-100/performance