It's the same the whole world over

kidmugsy

One reason some DB pension plans got into trouble was pension contribution "holidays" by employers. The ignorant bleat "greedy swine". The knowledgeable point out that the employers were acting under the threat of severe penalties from HMRC if they didn't take holidays. (The Chancellor of the time, Nigel Lawson, should hang his head in shame.)

So far, so familiar. But I've just learned that the same thing happened in the US. "Some firms began funding their plans very well, and the IRS [Inland Revenue Service] didn’t like the loss of tax revenue, so regulations were created to stop overfunding of pension plans. These regulations put sponsors in a box. Given the extremely strong asset returns of the ’80s and ’90s, it would have made sense to salt a lot of assets away, but that was not to be. Thanks, IRS."

Source: http://alephblog.com/2015/08/08/thinking-about-pensions-part-1/

Thrugelmir

kidmugsy wrote: »

One reason some DB pension plans got into trouble was pension contribution "holidays" by employers.

A certain Chancellor also raided pensions for some £5 billion a year at the time. In today's money would be far more.

kidmugsy

Ah yes, Mr Broon. But the US example shows that you don't need a Chancellor whose personality had been warped by frustrated ambition: DB pensions can get into the soup without such help. They are, alas, soup-friendly.

The alephblog author has written a companion piece on the difficulties of living off drawdown.

(1) "You don't know how long you, your spouse, and anyone else relying on you will live. Averages can be calculated, but particularly with two people, the odds are that one will outlive an average life expectancy. Can you be conservative enough in your withdrawals that you won't outlive your money?

(2) My estimate of what the safe withdrawal rate is on a perpetuity is the yield on the 10-year Treasury Note plus around 1%. That additional 1% can be higher after the market has gone through a bear market, and valuations are cheap, and as low as zero when you are near the end of a bull market."

Source: http://alephblog.com/2014/10/09/managing-money-for-retirement/

By the way, the ten year gilt is today yielding 1.4%. So his suggestion implies that the safe withdrawal rate for the UK is in the range 1.4% - 2.4%. Unhappy days.

nrsql

Pension funds were seen as a method of getting investment in the market.
Governments seemed to think it's was smart in good times to let companies use that money to invest (or pay increased salaries and bonuses) not taking into account that things move in cycles (no more boom and bust anyone).

Then it gets into trouble and the government panics and stops the funds benefiting from the future good times to recover and we are stuffed.
I'd be surprised if every democratic government doesn't go through this. Pensions need planning over decades whereas governments plan to the next election or two.

Saying that - defined benefit schemes are a ponzi scheme so the public sector is going to kill us anyway.
I can remember in the 80's that Belgium was basically bankrupt due to it's civil service pension liabilities and the EU was looking at Britain which had a much healthier pension liability - but that's been ruined now.
I'm waiting for MPs to vote to change their own pensions.

Brynsam

Pension contribution holidays were only part of the picture. With salary/cash constraints in the late 1970s and 1980s, many employers who were in trouble with the 'statutory surplus test' (i.e. they were facing huge tax bills because schemes were in surplus on that basis) used the surplus in the scheme to fund benefit improvements to their pension, thereby clocking up bigger liabilties for the future, which grew exponentially depending on the type of improvement ; or used seriously generous early retirement provisions to underpin redundancy programmes.

brewerdave

Brynsam wrote: »

....or used seriously generous early retirement provisions to underpin redundancy programmes.

That was certainly true in the early 90s - can still remember 50 somethings at the Company I was then working for, laughing all the way to the Bank as their pensions were made up to "full" service!

Zola.

Thrugelmir wrote: »

A certain Chancellor also raided pensions for some £5 billion a year at the time. In today's money would be far more.

How could this be done? And why?

Aegis

Zola. wrote: »

How could this be done? And why?

In reality it's nowhere near as straightforward as a raid on pensions. What Brown did was to remove the ability of pension funds to reclaim the 10% notional tax associated with dividend payments. This tax credit was awarded in respect of the basic rate tax to account for the fact that dividends are aid from post-tax funds, i.e. after deduction of corporation tax.


As this wasn't available as a reclaim for non-taxpayers outside pension funds, this ability to reclaim a notional tax credit was an anomaly, so its removal brought pension taxation into line with other income tax legislation. It wasn't so much a raid as a removal of a tax advantage, but the problem was that it left a hole in the long-term projections of many schemes.



There were knock-on effects, of course, and I'm not necessarily defending the action, but Brown gets a lot of stick for supposedly raiding pensions when in fact all he did was realign the tax rules for various categories of non-taxpayer.

kidmugsy

Aegis wrote: »

It wasn't so much a raid as a removal of a tax advantage, but the problem was that it left a hole in the long-term projections of many schemes.

I get weary of people fatuously saying "raid" when all they mean is that they disapprove of whatever they are describing. But calling Brown's action a "raid" seems fair enough to me. It's just that it was a raid on the income rather than the capital of the pension schemes.

Brynsam

kidmugsy wrote: »

I get weary of people fatuously saying "raid" when all they mean is that they disapprove of whatever they are describing. But calling Brown's action a "raid" seems fair enough to me. It's just that it was a raid on the income rather than the capital of the pension schemes.

Funny how so many people rushed to criticise him (me too, by the way!) but the man who started the rot in respect of ACT reclaiming was Norman Lamont, Tory Chancellor of the Exchequer in 1993, who reduced the amount of ACT which could be reclaimed. And it was another Tory Chancellor who, in 1988, had gone for the jugular on surpluses.

kidmugsy

Brynsam wrote: »

it was another Tory Chancellor who, in 1988, had gone for the jugular on surpluses.

Which is what I said above.