The day the Defined Benefit pension scheme died?

by | Jun 30, 2022 | Pension History

On this day 25 years ago, 2 July 1997, the Chancellor of the Exchequer, Gordon Brown MP, delivered the budget which has been accused of dealing a death blow to defined benefit pension schemes in the UK.

In his budget statement to the House of Commons, Mr Brown stated that “British companies have invested too little and too late in the economic cycle.” To encourage companies to re-invest rather than distribute profits, he proposed a “structural reform to encourage investment”:

“The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits. That cannot be the best way of encouraging investment for the long term, as was acknowledged by the previous Government. Many pension funds are in substantial surplus and at present many companies are enjoying pension holidays, so this is the right time to undertake a long-needed reform. The previous Government cut tax credits paid to funds and companies, so with immediate effect I propose to abolish tax credits paid to pension funds and companies.”

Advance Corporation Tax (ACT) is the prepayment of corporate taxes by companies in the United Kingdom that distribute dividend payments to shareholders. Pension schemes were able to reclaim this tax credit from HMRC as long as they maintained their tax-exempt status.

This was the first time the almost sacrosanct tax-exempt status of UK pensions savings, and of the income and gains on those savings, had been breached. And do we need to point out that the policy was not reversed when schemes fell into deficit or when employers stopped enjoying contribution holidays?

The announcement sparked the usual desperate punning headlines – “Caught in the ACT”, “Chancellor has stolen all the credit” – but commentators really didn’t find the change funny at all. For example:

Stephanie Hawthorn said “the Government has done the unthinkable” (Pensions World, August 1997).

NAPF Chairman Peter Murray was quoted as saying “This measure will take over £50bn from employers over the next ten years. Even Robert Maxwell only took £400m”, while NAPF director general Ann Robinson (no, not that Anne Robinson) complained about the lack of consultation: “The usual pre-Budget meetings did not take place. This was taxation without representation!”

The Pensions Management Institute described it as “very disappointing (and) will have a negative effect on long-term pension provision” while the Institute and Faculty of Actuaries feared “a loss of confidence in the stability of the environment of long-term savings, which cannot be helpful”.

And Sedgwick Noble Lowndes (remember them?) commented that because many employers may have to increase contributions to their schemes, “ironically this will reduce the corporation tax receipts to the Treasury. This harmful measure might not raise as much revenue as expected”.

We’ve delved into our archives and made a selection of articles from the pensions press in July and August 1997 available on the PAT website. It’s clear many commentators trace the decline of the defined benefit scheme (or at least, schemes where the employer bore the “balance of cost”) to this unprecedented change. Do you agree? We’d love to hear what you think!