Jeremy Warner's Outlook: Efforts to clear up Britain's pensions mess have only made a bad situation even worse

Hypocrisy of anti-tax avoidance

The crisis that has befallen Britain's occupational pensions system is an old story, I know, yet it is also an ongoing one and the number of business leaders who openly blame it directly on the Government has in recent months become ever more striking. The issue rarely fails to figure at City lunch tables these days, and the anger felt by many companies, directors and employees alike, is palpable.

The crisis that has befallen Britain's occupational pensions system is an old story, I know, yet it is also an ongoing one and the number of business leaders who openly blame it directly on the Government has in recent months become ever more striking. The issue rarely fails to figure at City lunch tables these days, and the anger felt by many companies, directors and employees alike, is palpable.

The rot started when Gordon Brown determined to tax pension funds on their dividend income, a move which bought the Exchequer an extra £5bn a year. Do the maths. That's a cumulative total of more than £40bn, and though this plainly wouldn't be enough to wipe out the combined £120bn deficit of Britain's defined benefit pension funds, it would certainly make the crisis seem a lot less threatening.

Yet paradoxically much of the recent damage has been inflicted by legislative efforts to patch the system up. Most of this sticking-plaster approach was well-intentioned enough. However, in practice all it has done is confirm the old truism that once you allow the mechanic under the bonnet he'll just create a whole host of new problems until eventually the big end has gone too.

There are a myriad of structural reasons why final-salary pension schemes have for many employers become unaffordable. Greater longevity, the collapse of equity markets and historically low interest rates have substantially increased the costs to companies of providing these benefits. The Government cannot be blamed for that.

What it can be blamed for is a whole raft of ill thought out measures to buttress the system which by placing greater demands and costs on sponsoring companies has further increased the disincentive to offer occupational pensions. Indeed, given the present panoply of regulation, it is hard to see why any company would want to keep open their final-salary schemes. I'm not sure who the last to turn the lights out will be - maybe Unilever or BP - but even in very large and apparently solvent companies, investors and creditors are not going to tolerate these competing calls on their assets for much longer.

One of the reasons the Government is being forced to address the pensions "time bomb" through the forthcoming Turner report is because of the collapse of the final-salary pensions system. In the past, most private sector workers could have relied on these schemes to provide a decent retirement. Today just one in four private sector workers belongs to such schemes. More than half the private sector workforce have no pension provision at all beyond what the state provides. Over the past 10 years, a perfectly good, private sector solution to the pensions problem has been in effect junked. And it is going to get worse.

Again, this is not wholly the Government's fault. Structural changes in the labour market including the end of jobs for life are as much to blame. But from the tax raid on pension funds onwards, quite a lot of it is.

The Government's legislative response to the pensions problem was in some respects a perfectly sensible and correct one. A growing number of pension schemes were being left with big unfunded deficits when their sponsoring companies went bust, and were therefore unable to meet their obligations. To prevent these liabilities bouncing back on the taxpayer, the Government set up a pensions protection fund (PPF), which is financed through a levy on other, more solvent pension schemes.

This in itself caused much consternation in the industry, as the solvent are being asked to bail out the insolvent, further undermining the inclination of employers to provide final-salary pensions.

So to try to prevent the claims on this fund becoming too onerous, the new Pensions Act has also created a Pensions Regulator, whose job it is to ensure that pension schemes are adequately funded by their sponsoring companies. The Pension Regulator's purpose is also to ensure that companies and their backers don't so arrange their affairs as to dump unwanted pension liabilities on the new fund, a ploy that in insurance parlance is called "moral hazard".

This in turn creates the need for highly intrusive regulation. All corporate transactions where there is a pension fund involved must be vetted. The capital structure of takeovers has to be approved, lest it endanger a company's ability to fund its pension scheme. Indeed the Pensions Regulator, David Norgrove, a former head of the Marks & Spencer pension fund, has gone so far as to insist that a pensions deficit needs in future to be regarded as a corporate debt, to rank alongside other creditors.

This is a step change in the way these liabilities are treated. In the past, pension deficits would go unreported and largely ignored. They also tended to be regarded as a temporary phenomenon which appreciation in the stock market would eventually close. Modern accounting rules require that these deficits be recognised in the accounts. The pressure from regulators is meanwhile that these future liabilities should be fully backed by "riskless" assets such as government bonds.

To make matters worse, Mr Norgrove has indicated that he'll go down the American route whereby companies in financial difficulties can indeed dump their pension liabilities on the PPF if it prevents them from becoming insolvent. In return the PPF gets a stake, typically 10 per cent, in the company which is being saved. Already just such a deal has been struck, this with the insurance broker Heath Lambert. Some 1,800 jobs have thereby been "saved".

This in itself creates a distortion in the commercial system, as it encourages companies to believe they can avoid insolvency by offloading their pension liabilities on to the PPF. The regulator has created the moral hazard he's instructed to prevent. In the US, whose much older Pensions Guarantee Corporation PGC) is sinking under more than $60bn of liabilities, the process has already reached its logical conclusion. Other airlines are being forced to follow United Airlines in attempting to foist their pension liabilities on to the PGC, if only because United gets a competitive advantage by so doing. It's worth $600m in annual costs.

Capitalism requires a degree of Darwinian natural selection to function properly. If companies are artificially supported, then the cycle of perpetual improvement breaks down. The irony of government efforts to support what remains of our occupational pensions industry is that it has only succeeded in making a bad situation a great deal worse. Goodness knows what Adair Turner, the chairman of the Pensions Commission, is going to recommend to replace it. The Government's involvement hardly gives cause for confidence.

Hypocrisy of anti-tax avoidance

Where do the boundaries lie between legitimate tax planning, tax avoidance and outright tax evasion? The issue has been raised afresh this week by news that KPMG may face charges in the US for marketing "abusive" tax shelters to wealthy clients.

In this particular case, there's no room for doubt. The firm admits the schemes were unlawful. Yet in most cases of tax avoidance, the hypocrisy of the authorities is palpable. On the one hand we are invited to believe it immoral. In the US, Britain and Australia, tax advisers are now required to seek pre-approval from the revenue for their tax-saving wheezes.

Yet with a different hat on, all these jurisdictions actively market themselves to international business on the basis of their supposedly benign tax regimes. Tax competition? Nonsense. Most of these supposed tax benefits are simply tolerated forms of tax avoidance, often at the expense of a rival jurisdiction. The rule seems to be that tax avoidance is wrong verging on the criminal when at your own government's expense, but perfectly fine when at somebody else's. No wonder no one knows where they stand any more.

j.warner@independent.co.uk