Reviews for "City of Thieves"

"An insider's view to insider trading ... written with vigour and authority."

LITERARY REVIEW



"...a brilliantly constructed, intelligent, thrilling read."

IRISH EXAMINER



"A thriller that puts the boot into bullies in the City's financial world."

INSEAD BUSINESS SCHOOL

Saturday 13 February 2010

The Pensions Time-bomb

If you’re worried about saving for your pension, I’ve got news for you. Your own pension isn’t the one you should be worrying about. You’re likely to pay more into other people’s pensions than your own – those other people being the millions of public servants with gold-plated pensions that you and I will be funding for the rest of our lives.

And just to add insult to injury, remember that, by law, paying for public sector pensions takes priority over saving for your own pension. After all, paying taxes is mandatory whilst making private pension contributions is voluntary.

In pensions, like in many other areas, most public sector employees have faced little, if any, pain, while the rest of the country has just recovered from cardiac arrest. Until the public sector feels the recession the rest of the country has been experiencing for the last two years, their excesses will sink us all.

The Deputy Prime Minister, Harriet Harman, has built a career on fighting inequality. In fact, she’s about to introduce even more legislation to deal with it. Yet her forthcoming Equality Bill seems to have missed one of the biggest inequalities of all – the inequality between public and private sector pensions.

In the fifties and sixties the British government, like many other governments around the world, struck a deal with businesses in the private sector – let’s call it the pensions contract. If businesses looked after their workers in their old age, the government would offer them generous tax deductions for their efforts. A key element of that deal was longitude; for it to work, it had to be a long term deal. After all, most of us spend 40 years saving for our pension. If the pension deal changes halfway through our lives, how can we possibly plan for our retirement?

When Gordon Brown became Chancellor, he systematically set about breaking that 40 year promise through a series of stealth taxes. But he did not raid everyone’s pension – only those less likely to vote for him. As he chipped away at private pension pots, he gold-plated public sector ones, including his own, that of the civil service that report to him and other public sector servants that he likes to champion. The result is that the country has accumulated a pension liability it cannot afford, and – worse than that – the benefits are grossly skewed to favour public sector workers, rather than the private sector workers who pay for it. Here are two examples of Brown’s stealth taxes on private pensions:

In 1997, Brown abolished Advanced Corporation Tax (ACT) relief on private pension funds. Terry Arthur, a fellow of the Institute of Actuaries, has estimated that this policy alone has reduced the pension funds of private sector workers by between £100 billion and £150 billion. Brown kept public sector pensions gold-plated.

In 2008, following the credit crunch, Darling removed a host of tax benefits from private sector pensioners, but – again – left public sector pensions gold-plated.

These double standards serve not only to create inequality between private and public workers in retirement, but also to shorten the fuse wire of the public pension time bomb that could one day bankrupt our country.

Here are some of the policy areas the government needs to rebalance if it is serious about tackling the problem.

Disclosure imbalance
Private companies are obliged by law to calculate and disclose their pension liabilities on their balance sheet. The government exempts itself from this rule. We know what governments pay out in pensions each year, but not how much they will have to pay in future, based on commitments they have given. The government should disclose its best estimate of our public sector pensions liability on its balance sheet, just as it asks private sector businesses to do.

Funding imbalance
Private companies are obliged by law to fund their pensions fully. If there is a pension deficit, the pensions regulator has the powers to force companies to devise a plan to fund that deficit within ten years. This kind of policy can be very costly for business. For example, BT this week announced announced a £9bn pension deficit – that’s about the size of the BT's entire market value. BT has a 17 year plan to plug the deficit, but City analysts are worried that the pensions regulator might force BT to act faster. That caused its share price to collapse on 11 February 2010 by 12%. Ironically that, in turn, caused pensioners in other private sector companies to lose out too, as most UK pension funds hold BT shares. Despite such heavy handedness when it comes to the funding of private sector pensions, the government does not fund its own pension fund. Instead, today’s pensioners are paid by today’s taxpayers. This should change. The government should put aside a proportion of tax revenues to fund its own public sector pension liability, in the same way that it asks the private sector to do.

Risk imbalance
The more the government raids private sector pensions, the more private sector companies renege on their side of the pensions contract. Many private businesses have closed their defined benefit schemes (which guarantee pensions on the basis of a worker’s final salary) and switched to defined contribution schemes (which pay into a fund which may or may not grow to provide an adequate pension, depending on market conditions). This switch from defined benefit schemes to defined contribution schemes takes all the risk away from business and places it on labour - workers have no certainty with regard to either the final pension amount of their pensions or whether they will get one at all. By contrast, public sector workers get a guaranteed pension – they carry no risk, because the risk is carried by us taxpayers. Governments should pass responsibility for public sector pensions to public sector workers, in the same way that they have forced private companies to do.

Security imbalance
Public sector pensions are guaranteed. Private sector pensions are a lottery. You can save all your life and still end up with nothing. Much of this has been due to poor government regulation of the private sector fund management industry and a failure of the government to provide private pensioners the same safety net they offer public sector pensioners.

In 2000, Equitable Life, a private pension provider, effectively went bust. Those people who depended on the company for their pensions were told to make do with substantially less than they expected, with some getting nothing until they signed away their rights. In July 2008, the pensions ombudsman, Ann Abraham, published a highly critical report on the government’s handling of Equitable Life and called on the Prime Minister to set up a compensation scheme for policyholders who lost money. Her rationale was that the government’s poor regulatory oversight had largely contributed to these pensioners losing most of their life savings. The government refused to comply, despite being found guilty of what many would describe as gross negligence.

The government should protect private sector pensions (by stronger regulation) with the same vigour that they protect public sector pensions. After all, the main reason private sector pensions are under-funded is because the government has repeatedly raided those funds.

Efficiency imbalance
When private sector businesses face falling revenues, they cut costs to survive, and often their workers have to pay. When the public sector faces falling tax revenues, they seem to follow a different set of rules. All too often, they are quick to take on debt and slow to control spending, landing taxpayers with a higher bill for tomorrow. Like businesses and households up and down the country, governments need to live within their means. That means that they must fire inefficient workers and cut unnecessary expenditure. Failure to properly manage budgets must carry consequences for ministers.

Enough is enough
There comes a point when a nation can no longer afford its commitments. At that point, governments have to take action before it is too late. Large economies like the US – whose currency is the world’s reserve currency - can borrow large sums from foreign creditors. For smaller countries like the UK, there is a limit to the amount of government borrowing the market will bear. As Chancellor, Gordon Brown insisted that it was not prudent for a country to borrow more than 40% of GDP. Yet, by 2012, Brown now expects UK net government borrowing to reach 78% of GDP. He’s broken his own self-imposed golden rule – and that’s before accounting for the nation’s public sector pension liability.

What makes the problem more acute is that there is little incentive for politicians of any persuasion to fix it. The problem has a 50 year time line, but most politicians don’t plan much beyond 5 years to the next general election. Nobody in Westminster is taking the long term view on pensions.

Fixing the pensions problem will hurt more people than it will benefit. So it’s a medicine that no politician wants to offer the electorate: public sector workers will have to work longer and accept lower pensions; politicians will have to fire incompetent civil servants, doctors, policemen and teachers; public services will have to be prioritised with the lowest priority services cut. In a country, where more than 60% of British families receive some kind of government handout, you are destined to lose an election by suggesting that those handouts are no longer affordable.

Last week Greece had to beg France and Germany to save it from bankruptcy. It had a strong card to play – it was part of the Euro zone. If Greece collapsed, the Euro would be badly damaged as a currency. Britain is not in the Euro zone. If we collapse, no one in Europe will help us. Only the IMF stands between us and the edge of a cliff. And when the IMF lends, it doesn't mess around. The country will get a sudden jolt, with a massive drop in living standards until we have brought our debts under control. We tried that medicine in 1976 and it wasn’t pleasant.

The government is set to bring in an Equality Bill. Let it sort out the lack of equality in our pensions before this time-bomb blows up in all our faces.