Budget attack on pension relief to penalise workers

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COMPANIES are warning the Chancellor, Kenneth Clarke, that they cannot afford to compensate employees for the steep fall in the value of their pension schemes that would result from an expected attack on pension tax advantages in the Budget. Instead, employees will have to meet the extra burden alone, through higher pension contributions or lower benefits.

A growing number of pensions experts and City analysts believe a likely revenue raising- initiative for the Chancellor in the Budget will be to reduce or abolish the tax credits enjoyed by pension funds on dividend payments.

They believe the Chancellor would see this as the most politically acceptable method of raising money because, while the Treasury would benefit by about pounds 3bn a year, the electorate would not notice the tax increase immediately.

In private, however, the directors of some of Britain's biggest companies are saying they would simply refuse to make up the shortfall this would produce in their occupational schemes. Battered by years of recession, they say they cannot afford the extra burden it would impose on their costs.

Cutting the tax credit would slash the value of almost all pension funds by up to 20 per cent, leaving many unable to meet all their future commitments. Even funds which currently enjoy healthy surpluses could fall into deficit. If companies refuse to help out, everyone in occupational or private schemes would suffer an immediate steep rise in contributions or a drop in benefits.

'Boardrooms would review what pension provision there should be,' said David Morgan, chairman of the Parliamentary committee of the National Association of Pension Funds. 'Should they provide pensions at all? The changes to the tax credit in the last Budget made this a topic in all company boardrooms.'

In the last Budget, the Chancellor reduced the tax credit on dividends from 25 to 20 per cent, costing pension funds pounds 150m this year.

British Telecom has had to pump an extra pounds 800m this year into its pension fund following the tax change. Several other large companies - such as Guinness, Whitbread and Cable & Wireless - have also been forced to increase payments into their funds or end pension fund holidays early since the last Budget.

'Some companies may well rethink their pension arrangements if the Chancellor goes even further this time,' commented John Wroe, financial controller of BT.

'Companies are recovering from recession and don't have much money to pump up their pension schemes,' said John Rogers, secretary of the NAPF's investment committee. 'But if they don't have more money and yet still have to meet pension fund solvency levels, they would have to cut pension benefit levels. Sadly, it is the best schemes that would be hardest hit rather than the grotty old schemes that just offer the basic benefits.'

If companies refuse to top up their schemes, they can:

Leave their employees to make up the shortfall instead.

Wind up their occupational scheme altogether.

Bar new employees from joining the company scheme, obliging them to take out personal pensions instead.

Reduce the level of pension benefit to match the reduced value of the pension fund.

'It's the pensioners at the end of the day who'll miss out,' said Mr Rogers.

Britain's 4 million personal pension fund holders would also be hit. 'People were persuaded to leave the state pension scheme on the basis of returns gross of tax,' said Richard Whitelam, a pensions expert at Bacon & Woodrow, the consulting actuary. 'If the rules are changed to give a return net of tax, many of those people would have done better to have stayed in the state scheme. It would, in effect, be a con by the Government.'