Time for a ‘pension tax’ on companies

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The FT reports:

The BT Group Pension Scheme – the UK’s largest private sector retirement fund – had only enough money at the end of 2008 to pay about 57 per cent of promised benefits if the telecommunications company were to become insolvent, and said it intended to pare back sharply its future investments in equities in the future.

The shift in strategy is significant for a scheme that has consistently taken the view held that it is investing for the longer term and therefore, in spite of the fact that the scheme is mostly comprised of pensioners or deferred members, equity investments remain appropriate investments.

In 2007, 57 per cent of the assets were allocated to equities. The BTPS said that its target has now been cut to 33 per cent of the portfolio.

Way back in 2003 I, with my co-authors of ‚ÄòPeople’s Pensions’ suggested that relying on equities as a basis for pension funds was absurd. It’s a shame it has taken BT and its fund managers so long to cotton on.

And given that the FT suggests the deficit may actually be bigger than the market worth of BT it is clear BT can never make this up from cash payments, at least without crippling the business.

A pension tax is the only option because it is clear our pension system is not working. The state cannot pay the incomes needed to maintain an aging population out of the taxes paid by a declining working population. The private sector cannot do so from cash contributions it makes into pension funds that are subject to cyclical booms and busts, partly because of excess cash resources being invested in shares by pension funds.

We have to be realistic about what pensions are. They are mechanisms for transferring property rights: between generations and from the owners of capital to the suppliers of labour. This blunt reality is rarely stated; that does not alter the truth inherent in the statement.

Recognising that truth allows us to propose another tax, one based on the pioneering work of Rudolf Meidner in the 1950s and 60s in Sweden. This would require that all companies employing more than a small number of staff each year to pay a tax settled in the form of an issue of their shares. The rate would need to be determined, but it would be a significant percentage: BT will be making pension contributions equivalent to 20% of its market capitalisation over the next 4 years. A tax rate of 5% of capital might therefore be required.

The shares in question would be issued to a national pension fund. That fund would have obligation to manage those investments to make a return to pay pensions for all people in the UK, not just the employees of the companies that are taxed.

The benefits of the tax are obvious: it does not reduce the cash capacity of the companies that make it to invest in the future as do current pension contributions; it cuts out the current ‚Äòmiddle man’ in the form of the City that currently extracts an undue percentage from all pension contributions made, and it is applied across the board.

Of course there are problems that would need to be tackled, such as the enforcement of the obligation on the subsidiaries of foreign companies trading in the UK. Cash alternatives might be required if they cannot or do not make equity contributions. These would have to be enforceable. But these are technical issues. The fact is the tax is needed to ensure that sufficient wealth is transferred into funds maintained for the benefit of the retired population of the UK. Nothing else can provide those funds that are needed to prevent mass poverty amongst the old whilst maintaining the active investment required in productive capital needed to generate the real wealth on which they will depend.