The UK pension funds association has published a pre-budget submission in a bid to preempt widely-expected reforms to pension fund taxation which it says could cost pension funds, employees and companies billions.

Adding to the lobbying effort, UK fund manager PDFM, in its annual Pension Fund Indicators survey published last month, warns that the ex-pected reform of Advance Corporation Tax (ACT) credits could see a shift in pension fund investment from the UK to overseas because of re-duced tax advantages.

The lobbying effort by the National Association of Pension Funds (NAPF) is focused on the defence of two areas of tax exemption: credits on ACT and the tax exempt status of pensions contributions and investment income. The Labour government could change both in its first budget planned for July this year.

The NAPF submission calls for ACT credits to be restored from the current 20% to the basic rate of tax at 24%,while warning that a further reduction could see employers required to plough billions of pounds into topping up funds or increasing contributions. It points out that the previous reduction in the ACT credit in 1993 led to immediate fund losses while new losses could mean funds falling foul of the minimum funding requirement.

In the survey, PDFM identifies two benefits: a tax credit adding to total return currently about 0.75% per annum for pension funds and lower retained earnings with capital allocation more under the control of UK fund managers via re-investment in equities than by company managers.

This has, the survey notes, led to accusations of underinvestment but PDFM does not accept this, pointing to good equity returns.

The NAPF submission addresses the issue of altering the tax exemption of contributions and investment income which could prove a powerful disincentive to individual saving for retirement and to employers who provide high quality occupational pensions.

Relief on contributions is currently provided at the highest tax rate of 40% (up to a limit), but a reduction to the basic rate has been canvassed and may particularly penalise employees who move between the basic and top rate during their careers.

The association is also concerned that the government could define pensions contributions as a benefit in kind" which would be open to taxation. It describes short-term capital gains tax as a "misconceived concept."

John Lappin "

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