With Labour odds-on for a thumping general election victory on 4 July and analysts musing on what the implications could be for UK personal finances, it’s an opportune moment to look back to when the party last enjoyed a landslide and the key policies introduced in its early days at HM Treasury. When chancellor, Gordon Brown's decisions have had long-lasting effects on personal finance and are still debated today.
Brown's abolition of dividend tax relief has been blamed for driving the decline of defined-benefit (DB) pension schemes in the private sector. Funds couldn't make up the shortfall in the context of rising life expectancies, making these 'gold-plated' schemes more expensive. The policy, introduced in 1997, saved the exchequer roughly £5bn a year: before Brown's change, pension funds could claim a 20 per cent tax credit on the dividends they received. Brown argued that this system was effectively incentivising companies to pay out dividends instead of investing. He said in his Budget statement that “many pension funds are in substantial surplus and at present many companies are enjoying pension holidays”.
Not everyone accepts the narrative that Brown drove the DB decline, even if most pension consultants are in agreement that the policy had a big impact. Nest Insight argues that “DB schemes were arguably also in long-term decline as a result of demographic change, and had traditionally only covered a small part of the working age population. Rescuing DB schemes could not ensure universal second-tier pensions coverage”.