The NAPF's chairman, Peter Murray, said the Chancellor's widely predicted move would require public and private sector employers to contribute an extra pounds 50bn to pension funds over the next 10 years.
"Even Robert Maxwell only took pounds 400m," he said.
The Chancellor said the abolition of tax credits, combined with cuts in corporation tax, would help create the right climate for business investment. Treasury estimates put the take at pounds 2.3bn for the current year, rising to pounds 3.9bn next year and pounds 5.4bn a year thereafter.
But observers said the cuts in corporation tax from 33 per cent to 31 per cent, the UK's lowest-ever rate, and from 23 per cent to 21 per cent for companies with profits of less than pounds 300,000 and limited investment incentives for smaller companies would do little to sugar the pill.
Moreover, liability to other taxes has traditionally put the UK further up the table in terms of effective tax rates.
Paul Wopshott, tax partner with accountants Price Waterhouse, said: "Abolition of tax credits on dividends received by pension funds will reduce the returns they are able to make. To maintain pension levels greater contributions will be needed from employers and employees, increasing payroll costs."
Business had been arguing that if ACT was abolished it should not be done in a piecemeal fashion, but should form part of the thorough review of the corporate tax system referred to by the Chancellor in his speech.
The tax credit on dividends, which the Government believes encourages companies to pay dividends to shareholders rather than invest in such areas as plant and machinery and research and development, results from a facet of the tax system known as Advance Corporation Tax.
This is a by-product of the imputation system introduced in the UK in 1973 in an effort to reduce double taxation, and is triggered when a corporation pays a dividend.
The company pays shareholders a dividend net of the starting rate of income tax - 20 per cent - and pays the tax direct to the Inland Revenue on behalf of the shareholders.
The real beneficiaries of the system are those that do not pay tax, mostly tax-exempt institutions, such as pension funds, which account for 50 to 60 per cent of UK share ownership. They, as well as charities, which will be protected from the effect of the change, can reclaim the ACT paid by corporations on their behalf and receive substantial extra income in the form of gross dividends.
It has long been assumed that this extra "incentive" for City institutions to receive dividends has accounted for the British disease of short-termism by diverting funds away from investment in research and development and related areas.
Last week's UK R&D Scorecard showed Britain at the bottom of the heap of leading industrialised nations in terms of spending in this area.
However, if firms have to increase their pension contributions or pay higher cash dividends to compensate shareholders for the reduced value of the dividend tax credit, they will have less cash available for investment.
Last month, research by academics at the City University Business School and sponsored by the National Association of Pension Funds indicated that companies that pay dividends are more likely to invest in research and development than those that do not pay dividends.
Actuaries at Bacon & Woodrow have calculated that, without other changes, abolition of the tax credit will reduce pension scheme income from UK equities by 20 per cent. Research by BZW indicates that corporations would not be able to weather the storm as easily as has been suggested.
Recent market strength has enabled many employers to enjoy a "contribution holiday", with as many as half of NAPF schemes receiving either subnormal contributions or nothing at all from employers.
But the firm estimates that the "inevitable downward revaluation" of pension funds on a loss of the tax credit could see nearly half the FTSE 100 companies' pension funds underfunded and a number struggling to meet the statutory minimum funding requirement.Reuse content