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BUSINESS AWAITS LABOUR CHANGES

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LONDON-Risk managers and members of the U.K. insurance industry are still assessing what the Labour Party's victory in the general election earlier this month means to them.

With an unprecedented majority of 179 seats, the new Labour government immediately began organizing its ranks. Prime Minister Tony Blair announced the core members of his cabinet within two days of the election, and the ministers-many of whom have never served in government-began reorganizing their departments.

Within a week of the election, the financial community was pleased to see Chancellor Gordon Brown raise interest rates slightly and grant independence to the Bank of England, meaning the Bank can now set interest rates and make other policy decision independent of the government. The U.K. Stock Exchange price index, which had faltered when former Prime Minister John Major called the election, responded to Mr. Brown's moves by hitting an all-time high.

But many Labour government policies are yet to be clarified. It has committed to maintaining the overall low inflation, low interest-rate environment inherited from the departed Conservative government-a departure from Labour Party's workers' rights approach before Mr. Blair took the reins.

"Economic stability is the essential platform for sustained growth," said the Labour Party manifesto. "In a global economy, the route to growth is stability, not inflation. The priority must be stable, low-inflation conditions for long-term growth."

This position encouraged the business community, though it is sending signals that "New Labour" still must win its trust.

"There is a risk that the new government will implement an emergency budget and introduce a range of measures aimed at honoring manifesto promises," warned Ina Barker, executive director of the Assn. of Insurance & Risk Managers.

Political commentators are anticipating a budget within the next few months, instead of the normal November timetable. The government's impatience to implement changes immediately appears to bear out this expectation.

Already Robin Cook, the foreign secretary, has committed the United Kingdom to joining the "social chapter" of the European Union's Maastricht Treaty, conferring certain rights such as a minimum standards in working conditions and employee consultation. And in its manifesto, Labour said it plans to implement minimum wage levels.

Both AIRMIC and the Assn. of British Insurers say they are concerned that the new government will use the Insurance Premium Tax, raised to 4% from 2.5% in the last budget, as a means of generating income. The IPT applies to personal and some small commercial insurance coverages.

Some small businesses have already responded to the introduction of IPT by reducing-and in some cases canceling-their insurance coverage, and AIRMIC sees any further increases as potentially "disastrous."

Ms. Barker also warned against the new government pushing National Health Service costs onto the insurance market. "There should not be back-door funding of the NHS by recovering medical and other costs from liability insurers," she said, referring to last year's Law Commission report suggesting that medical expenses relating to accidents and illnesses in liability situations-such as the workplace-should be borne by insurers rather than the NHS (BI, Dec. 23, 1996).

In its manifesto, Labour took a fairly pragmatic stance on the issue of Northern Ireland, calling for a "new political settlement that can command the support of both" sides. In recent years all major terrorism-related claims have been the result of activities by the Irish Republican Army on the U.K. mainland.

For risk managers in mainland Britain, terrorism remains a major issue. AIRMIC has called for the government to maintain Pool Reinsurance Co. Ltd., the government-backed reinsurer of property terrorism risks, though it does concede that the insurance industry should also try to provide new products.

There may be hazard lights on the horizon for occupational pension plans as well.

As institutional investors, pension plans own about 35% of U.K. stock, amounting to (British pounds) 650 billion ($1.05 billion) of investments. Labour plans to levy a "windfall tax" on the profits from the recently privatized public utilities-raising between (British pounds) 3 billion ($4.84 billion) and (British pounds) 10 billion (16.14 billion)-to fund youth and long-term unemployment programs, according to the party manifesto. Not only would pension funds see their investments depleted by this move, but also a rumored reduction in tax relief on dividends from investment income could hit them, say political commentators. Currently the tax credit on so-called "advanced corporation tax," or ACT, on dividends stands at 20%.

Alan Fishman, chief actuary at employee benefit consulting firm Sedgwick Noble Lowndes Ltd., estimates a 5% drop in the rebate would result in a loss of (British pounds) 600 million ($968.1 million).

"Pension funds tend to live off the dividends from their equity investments," explained Mr. Fishman. "Increasing the tax on dividends would have an impact on their investment income."

In particular, employees and retirees in defined contribution plans could see their funds decline, "when many of these are already failing to deliver an adequate pension for retirement," he warned.

Mr. Fishman also foresees employers moving away from defined benefit plans if ACT rebates are reduced, as they see their investment income eroded, requiring larger contributions.

Tom Ross, chairman of the U.K. National Assn of Pension Funds, predicts that removing ACT completely will cost U.K. pension funds about (British pounds) 50 billion ($80 billion).

"This additional burden will be on top of an endless stream of costly regulatory requirements under the Pensions Act and could accelerate the trend toward defined contribution schemes where employers do not have to carry the investment risk," Mr. Fishman said.

But he welcomed Labour's proposals for "stakeholder" pensions, a second-tier pension system designed to supplement the state pension. In its manifesto, the Labour party recognized the need for more portable private pensions, to parallel the changing patterns of employment, and said it will "encourage new partnerships between financial service companies, employers and employees to develop these pension schemes."

Whether these plans would be mandatory is not known. Nevertheless, Mr. Fishman said the plans "merit serious discussion."