UK – The UK government’s controversial 1997 decision to abolish advanced corporation tax relief has cost pension funds up to £150bn (€221bn) in total, the actuarial profession has been told.
The figure has usually been put at around £5bn a year, with the Pensions Policy Institute putting it at just £2.5bn annually.
But, according to new calculations from actuary and Pensions Management Institute fellow Terry Arthur, that figure could be a huge underestimate.
“This note suggests that it would be very hard to justify a (current) present value of anything less than £100bn, and £150bn may still be a conservative estimate,” says the Institute of Actuaries fellow in a missive to the profession.
Arthur, who is also a visiting fellow of the Institute of Economic Affairs, was responding to a Financial Times article in July which referred to the ACT change, one of chancellor Gordon Brown’s first decisions in office, as merely “tinkering”.
Arthur notes that Institute of Actuaries president Michael Pomery has referred to a total figure of £37.5bn as being too large.
“My own view has been radically different – essentially that in present value terms the original figure was £100bn or more, which I believe is similar to the present aggregate deficit in private sector pension funds,” Arthur writes.
In a closely argued analysis, he argues that the “most solid” starting point for an estimate of the effects of the removal of ACT relief “seems to be to assume that in the absence of selling all returns come from dividends – dividends whose growth is enhanced by retentions.
“This means a simple pro-rata (20%) reduction in the present value of pension funds’ UK equities in 1997.
“Together with the normal actuarial practice of using present values, direct comparison with scheme deficits is easily available – and can easily be updated via compound interest as time goes by.”
Bearing in mind the different views on the matter, he adds: “Altogether, now seems an excellent time for the actuarial profession to make an authoritative pronouncement.”