Blair did not exactly steal from the pension pot in the sense of there was loads of money sitting around, and it doesn't relate to State Pension but to private pensions.
Defined benefit pensions used to be relatively common for larger employers - if you stayed with a company for life, you'd receive a final salary pension (or similar), but if you left before retirement you'd get a smaller amount. There was typically a guaranteed minimum pension of, say, £400/month.
You or your employer could then also choose to "contract out" of the Additional National Insurance rate. You needed to pay Additional NI to qualify for Additional State Pension/State Second Pension/SERPS (basically if you didn't pay it, you'd be on a lower rate of state pension). Most public sector employees and lots of private sector defined benefit pension employees were contracted out. The benefit was you had more money in your pocket on pay day, and the company had to spend less in National Insurance contributions. So they'd put more money into your defined benefit contribution, and you'd be guaranteed that £400/month guaranteed minimum pension from your workplace pension and then additional benefits of £600/month as a result of contracting out, so £1000/month.
When private pensions put up their guaranteed minimum pension due to revaluations (e.g. inflation), they'd sometimes do a dirty financial trick. Your guaranteed minimum pension had increased to £700/month when you finally claimed your pension, but the pension fund would still only pay you £1000/month total, rather than adding your £600/month additional benefit to the £700/month for £1300/month. They were basically pocketing the difference and paying for the increased valuation of your minimum pension out of the benefits that should have been yours. This process was called franking.
This got cracked down on with anti-franking legislation in 1985, but it then caused open season on pension operators. Private pensions had tax relief for pension contributions, but this had enabled them to hoard large surpluses, from the 1986 budget;
However, I do need to deal with the growing problem of the rules governing pension fund surpluses. The dramatic improvement in the financial climate compared with a decade ago, most notably as a result of the sharp fall in inflation, has seen a number of pension funds become heavily over-funded. This presents a double problem, both aspects of which the Inland Revenue is at present having to deal with through the exercise of its discretionary powers.
In the first place, excessive surpluses, even if they arise unintentionally, represent the misuse of a tax privilege which was intended to assist the provision of pensions, and for no other purpose. So the Inland Revenue requires from time to time that surpluses be diminished. However, at the same time, the Inland Revenue feels obliged to turn down many of the increasing number of requests from companies which, often for good reasons, wish to take refunds from their pension fund into the company itself.
The absence of clear rules on how surpluses should and may be dealt with, and the consequent reliance that has to be placed on the exercise by the Inland Revenue of its discretion, have created considerable uncertainty and have unnecessarily constrained trustees' freedom of action. Therefore, I propose to replace these discretionary arrangements with clear and objective statutory provisions. In future, the amount of any surplus in a fund will be determined for tax purposes in accordance with published guidelines, based on a secure funding method and prudent actuarial assumptions, as advised by the Government Actuary. Where a surplus is 5 per cent. or less of total liabilities, no action will need to be taken. Where it is higher than that, action will be required to eliminate the excess.
It will be entirely a matter for the trustees and employers to decide whether the reduction is to be achieved by increasing benefits, or by reducing contributions, or by making a refund to the company. If, and only if, they choose to make a refund, the employer will be liable to tax at a rate of 40 per cent. of the amount refunded, so as broadly to recover the tax relief previously given. The effect of these new arrangements is likely to be a yield of £20 million in 1986–87 and £120 million in 1987–88.
Basically Thatcher's chancellor Nigel Lawson brought in an additional rule, that if pensions funds had more than 5% surplus over their liabilities, they'd be subjected to tax unless they either stopped putting money in for a while, increased pensions or alternatively gave "refunds" to the company - which encouraged generous early retirement schemes in the late 80s and 90s (retire age 50 and get a massive lump sum tax free!).
Then there was also the
Advance Corporation Tax, which had come into play under the 1973 Ted Heath government. Basically, it was supposed to stop a business paying out its profits as dividends, and so they'd withhold 30% of the value of the dividend as ACT, but if the recipient was tax-free (like a pension fund) then they'd be able to claim that 30% back. This gradually got reduced to a 20% claim back of 22.5% paid out under Major, and then Gordon Brown abolished ACT completely in 1997. This meant pension funds started losing out on their tax relief on dividends at completely to the tune of £5bn a year. Initially that wasn't a very significant amount but it compounded year-on-year with lost interest, so a pension fund simply didn't accrue like it used to.
There were also a couple of other things, so there was a change to how accountancy was conducted in the early 00s (unrelated to government) that meant instead of pensions being treated as future concerns, the entire pension liability was shown as a black hole in the budget if they didn't have the assets to cover them completely in the event they closed down tomorrow (the previous 15 years had discouraged them for hoarding money), which further discouraged companies. Also for a variety of reasons pension funds had become over reliant on equity securities, which meant they were hit hard by the Dot Com crash and then the 2008 financial crisis.
