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Defined benefit schemes face £3bn VAT hit

British companies may see their defined pension liabilities rise from 2011 as a result of Alistair Darling’s VAT cut in November.

A return to the original rate will lead to higher inflation and therefore
higher payouts on inflation-linked benefits for those who have retired or are
soon to do so.

As the economy enters what is widely expected to be a long and deep recession
lasting into the next decade, the Chancellor’s brainwave of stimulating consumer
spending by reducing VAT to 15% in his pre-Budget report will cause more pain
for companies, not less, pensions consultant
has suggested. This is because the expected return to a
normal rate of tax in 2010 will cause inflation to rise and push up company
contributions accordingly.

According to its calculations based on a pensioner currently receiving
£10,000 a year from a defined benefit scheme who will live for another 20 years
– and using HM Treasury forecasts to 2013 on inflation, and an expected
stabilisation of inflation at 2.75% thereafter – companies will end up paying
£144 more per person than they are now by 2015.

The pensions consultant put the value of company pension liabilities that
are, or will soon be, in payment at just under £300bn – though it added there
were no official estimates on this – and said, due to the VAT change,
liabilities could increase by around £3bn by 2028.

“The earlier VAT reduction will not produce offsetting savings for employers
because inflation would anyway be forecast to be below zero at the relevant
time,” says John Ball, head of defined benefit consulting at Watson Wyatt. “The
costs add up for schemes with thousands of pensioners. In the case of public
sector pensions, it will be the taxpayer who foots the bill.”

Watson Wyatt’s Ball added that unfunded public sector schemes’ annual costs
would also increase by £3bn as a result of the VAT change impact.

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