City & Business : Time to take the politics out of pensions

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The Independent Online
It has been estimated that an average person will vote in 20 general elections between making their first contribution to a pension scheme and collecting their last pension payment. That means 20 different opportunities for politicians to mess around with the pensions regime. In recent history there has been no fundamental reform. The principle of the universal state pension enshrined by Beveridge in 1948 has remained largely unchallenged. The universal pension was supplemented when the state earnings related pensions scheme was introduced in 1975, although Serps have been subsequently undermined. Last week, however, the Government proposed a welfare state revolution with its plans to privatise pensions.

It is a fascinating idea which recognises that there is indeed a pensions time bomb waiting to explode in the middle of the next century. The proposals have, unsurprisingly, been challenged by the Labour Party. However, once its critique moves away from rhetoric and towards practical shortcomings a degree of common ground becomes visible.

After a lengthy conversation with a senior Labour Party figure it became clear to me that there are the beginnings of a consensus emerging. The Labour Party is committed to retaining a state pension, but as a means of benchmarking privately funded schemes, not as a political icon. The stakeholder pension which Labour heralds as a centre plank of its thinking has all the attributes of a portable private pension. Regulation would play as big a part in any Labour reform of the pensions regime as it would under the Tories. Demographics suggest that by 2040 there will be a severe drain on the public purse from an increasing state pensions burden. Both parties accept this needs to be dealt with.

No matter which party is in power, there is likely to be a radical pensions overhaul before 2000.

Given the inevitability of reform and broad consensus on the involvement of the private sector, there is surely a case for taking politics out of this supremely important issue. We need a cross-party solution which would provide certainty, clarity and sustainability. A solution which is as lasting as the universal state pension will only be achieved with cross-party support.

Analysts, shamalysts

IF YOU are in the company of a City analyst this week, do not mention the names George Bulkley and Richard Harris. These academics from Exeter University are the authors of a paper in the latest issue of the Economic Journal titled "Irrational Analysts' Expectations as a Cause of Excess Volatility in Stock Prices". The paper is not entirely flattering about those who make their crust by forecasting company earnings. It claims you could forecast earnings more accurately by ignoring analysts and assuming that a company will grow earnings at the same rate as the average company. According to the academics there is virtually no correlation between forecast growth and actual growth.

However, the Bulkley/Harris paper is more than a sideswipe at analysts. There is an interesting conclusion which will appeal to investors seeking new ways to beat the market.

If the two academics are right there is good money to be made by investing in companies where low growth is forecast. Over a five-year period these companies will in fact produce earnings growth which is in line with the average. Assuming that their share price is depressed because of the low earnings view taken by analysts then an investor can expect to outperform the market by around 5 per cent over a period of five years. That, at least, is the evidence of analysis of this strategy if it had been deployed between 1982 and 1993.

The problem for analysts, it seems, is that they rely too much on history for their forecasting. The academics found there was negative correlation between growth in one five-year period and the subsequent five-year period.

If this is such a sure fire way to outperform, you might easily ask why no one has spotted it before. The answer lies in short-termism. The strategy only works over a five-year period and most certainly does not work on a one-year horizon. Anyone seeking to make a quick gain will be disappointed. The gains on low forecast growth shares can only be realised over a five- year period, which is the time it takes for the market to make good its earlier underestimation of a company's prospects.

It is an intriguing hypothesis. Come back in five years' time and we will know if it is right.

Let's get ruthless

THERE is a refreshing trend emerging among the world's financial institutions to deal with scandal in a ruthless and public fashion. The days when unfortunate local difficulties were shuffled quietly under the carpet and any punishment was handed out by discreet nods and winks are long gone.

Deutsche Morgan Grenfell set this in train in the wake of the Peter Young affair when it determined that senior heads would roll in the fund management division. In Tokyo there is talk that Hideo Sakamaki, Nomura's president, will resign in the wake of suspected unauthorised trading. NatWest is preparing a package of reprimands for those caught up in the pounds 50m loss on the interest rate options book.

Although pounds 50m is a lot of money to the likes of you and me it represents around 10 per cent of NatWest Markets' profits and is a mere drop in the pounds 1.6bn ocean of NatWest group's overall underlying profits. There would have been a strong temptation to hide the loss as part of normal trading, where it would not have been noticed. Rightly, this has been resisted. Nat West has taken the view that much can be learnt from your mistakes. But that lesson has to be learned in public. Staff who witness this week's punishments will be encouraged to be even more diligent in future. This approach is good for the bank and good for the reputation of the City.

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