FactCheck: Did Gordon destroy our pensions?
Updated on 23 October 2006
Has, as George Osborne claims, Gordon Brown single-handedly destroyed the pension system?
The Claim
"It will be up to us to rebuild a pension system that has been comprehensively, single-handedly destroyed by this Chancellor."
George Osborne, speaking at the Conservative party conference, 3 October 2006.
Background
Pensions are a tricky political issue. Britain's pensions have suffered steady erosion over the past decade, and many individual schemes have collapsed.
But whose fault is it? For his political opponents, the temptation has always been to pin the blame on Gordon Brown. He, after all, has been the man in the Treasury while Britain's pensions have been deteriorating.
But to pin the blame comprehensively on Gordon Brown rather overestimates the power that actually rests in the Chancellor's hand. In fact, most of the damage has been wrought by forces far larger than any government ministry.
Analysis
The main cause of the trouble is Britain's ageing population; as people live longer, the amount they have to save to provide for their retirement grows.
In particular, the pressure on pension schemes which pay a proportion of final salaries has been intense - causing many companies to close these schemes to new members.
In his speech, George Osborne says that 60,000 pension schemes have 'closed'. According to a parliamentary answer from February 2006, 53,854 pension schemes have wound up and 8,436 are in the process of winding up.
But 'winding up' doesn't necessarily mean that beneficiaries are losing out; in many cases they will still be entitled to all the benefits they have already accrued. And new legislation specifies that company schemes must be fully funded before they can be wound up.
Nonetheless, pensions are certainly under pressure (although the government's political opponents often exaggerate how much). But whose fault is it?
Pinning the blame
The piece of evidence most often used to pin the blame on Gordon Brown is his decision to abolish a tax relief measure, called ACT, which allowed pension funds to claim back the tax paid on dividends from companies in which they owned shares.
For the financial year 1999-2000, (the last year for which figures exist) this measure was taking an annual £5.4bn out of pension funds. This is the source used in the following claim which Osborne makes later on in the same speech:
"His £5 billion tax raid on our pensions was a disaster for which pensioners will pay a heavy price for many many years to come."
This sum was partially offset by other tax reductions, but it did place a burden on pensions. And it's worth putting the size of the problem in context. The UK's hundred largest companies - which only represent a fraction of total pension liabilities - had a deficit of £36bn in their defined-benefit schemes in July this year, according to research by actuaries Clark Lane and Peacock.
So £5bn a year would only account for a fraction of the country's total pensions deficit.
Continued...
Burst bubbles
The chancellor imposed this measure because, at the time, company pensions were in much better health. The stock market was high and rising, and many schemes were in credit. Since the dot-com bubble burst, those schemes which had invested their assets in the stock market saw their value plummet. This caused far more damage to their financial health than Gordon Brown ever could.
And, as FactCheck pointed out last year, Gordon Brown wasn't the first chancellor to use this source of funding. Although Gordon Brown was the one who abolished ACT, one of his predecessors had already taken a chunk out of it: Tory Chancellor Norman Lamont cut the rate of ACT from 25 to 20 per cent in his 1993 budget.
So, while Gordon Brown did change the tax regime in a way that disadvantaged pensions, the impact of his changes has been much exaggerated.
FactCheck Rating: 4 (How ratings work)
Verdict
The nation's pensions are in a state - though not so bad as is sometimes imagined. And Gordon Brown's 1997 budget did take some money out of the pension system.
But to suggest that he 'comprehensively, single-handedly destroyed' the nations pensions is an absurd exaggeration.
It's particularly ironic that a Conservative chancellor also delivered a smaller but very similar blow to the pension system in 1993.
Sources
George Osborne's speech, October 2006
Lane, Clark and Peacock
Written answer, Commons Hansard
FactCheck, 21 Apr 2006: Pensions stealth tax sneaks up on Howard
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