Holiday is over for companies' pension schemes

Pension contribution holidays are set to be abandoned by many leading companies in response to the Chancellor's abolition of the tax credit on dividends.

With the corporate sector due to put up pounds 9bn to pounds 10bn over the next 10 years to cover the predicted shortfall, actuaries report that many finance directors are asking if they are going to have to restart or increase contributions earlier than they thought.

Though most FTSE 100 companies contacted by The Independent yesterday said it was too early to say what they would do, analysts at BZW suggested before the Budget that among the companies likely to be hardest hit by the widely predicted changes would be British Steel, ICI, Rolls-Royce, British Telecom and British Aerospace. Martin Slack, senior partner of actuaries Lane Clark & Peacock, said yesterday that companies from all sectors were concerned and had started to contact the firm.

BT expects to have to top up its pension fund, while the Post Office suggested it might have to increase the price of stamps to cover an increase in contributions. But drugs companies Zeneca and Glaxo Wellcome, oil company Shell Transport and Trading and supermarkets group Asda said their funds were adequately funded for the immediate future.

The Post Office, which could see pounds 1bn knocked off the pounds 12bn value of its two funds, would not rule out an increase in the price of postage stamps as a result of the ACT move. It is seeking a meeting with the Department of Trade and Industry about how it can meet the cost, which it will find difficult despite recording record profits of pounds 577m last year. British Telecom, which had a pounds 800m surplus in 1995, is also expected to have to put further cash into its pounds 20bn pension fund.

The claims of shortfalls in pension funds brought a robust response from Alistair Darling, Chief Secretary to the Treasury. "It is not unexpected that the National Association of Pension Funds and others would pile in if any change at all were made in the system of taxation," he said.

Mr Darling claimed the combination of abolishing the dividend tax credit and cutting corporation tax would boost investment and profits and allow companies to make higher pension contributions, while the Chancellor, Gordon Brown, said: "The pension funds have very big surpluses. Indeed many companies have got pension holidays at the moment."

The reduction in tax on profits from 33 to 31 per cent was an "attempt to sugar the pill" said one financial adviser, but its benefits were far outweighed by the 1.5 to 2 per cent addition to wage costs that companies seeking to maintain pension funding would have to meet. Tax experts have also repeated suggestions that the move, which the Treasury says will raise more than pounds 5bn a year, will reduce rather than increase investment by diverting funds.

Organisations with final-salary schemes will be legally obliged to increase contributions to meet existing and future liabilities. But a further move away from final-salary schemes to money-purchase plans is widely predicted.

Additional reporting by Sarah Gillinson and Trupty Patel.

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