COMMENT : Above-board ways to tap company pensions

`To move from declaring the National Grid case a misuse of funds to saying that companies should not be allowed to take surpluses period would, however, be a mistake'

Tricky things, pensions. The Maxwells nearly went to jail for misusing pension fund assets but there has always been a perfectly legal way for companies to get their hands on their pensioners' money. This is to get the actuaries to declare that there's more money in the fund than is required to meet expected liabilities, and then simply swipe the surplus, or at least take a prolonged holiday from contributions. For obvious reasons this has always been contentious but it hasn't stopped companies doing it with abandon. Now along comes the Pensions Ombudsman, Dr Julian Farrand, to say that in at least one case, that of the National Grid, this should not have happened.

A number of the other privatised utilities are in exactly the same position, so Dr Farrand's adjudication plainly has quite far reaching implications. All the same, this is a bit of a special case. The terms of the scheme specifically disallowed the use of any surplus for the employer's benefit. So what the Grid did was to use its share of the surplus for the benefit of employees - or rather, to pay early retirement and other benefits to those it was making redundant. Since these were costs which the Grid would otherwise have had to meet from its own resources, the ombudsman has rightly declared this a misuse of funds.

To move from declaring this particular case a misuse of funds to saying that companies should not be allowed to take surpluses period, would, however, be a mistake. Most occupational pension schemes are not the sole property of the employees, though it is easy to see why they should think this. Typically, the employer will enter into an open-ended liability to meet promised benefits. That, in turn, obviously gives him certain rights of ownership. Certainly there should be a quid pro quo entitlement to any surplus in the fund.

Occupational pension schemes are a dying industry with most companies keen to move their employees on to straight money purchase personal pensions. But there's a long tail to be worked out before companies finally shrug off their pensions inheritance. Judging by this case and others like it, there's plenty to keep the lawyers occupied with yet.

How low inflation can compound errors

Here is what looks at first sight like a straightforward GCSE question; if you buy a computer with 500 megabytes of hard disk memory for 20 per cent more than you paid a year ago for an old older machine with 100 megabytes, what is the rate of computer price inflation? In the hands of economists, however, such questions have been turned into a whole new and highly contentious area of academic study.

This week the eminent economist Michael Boskyn claimed that US inflation has been overstated by about 1.1 per cent a year as a result of such improvements in quality. In the UK, the Bank of England has estimated the overstatement at between 0.35 and 0.8 per cent. Roger Bootle of HSBC says most economists come up with figures around 1 per cent.

Meanwhile, the Office of National Statistics, with typical statisticians' caution, believes it is probable, though not certain, that there is some overstatement built into the RPI, but thinks it is nowhere near the top of the Bank's range.

The main measurement difficulties are that there is a continual improvement in the quality of goods and services, consumers are becoming increasingly sophisticated in chasing special offers and they are also prone to substitute one product for another when the price changes. The ONS is in the middle of a big project to refine collection and measurement, which may include allowances for quality improvements in products such as cars, computers and audiovisual equipment.

The debate is of more than academic interest, however. Any overstatement hardly mattered when inflation was 10 per cent, but when it is around 2.5 per cent a small error looms large. If inflation has been overstated, it also means that economic growth has been consistently understated, because too large an amount has been deducted from the national product when adjustments are made for prices. Furthermore, indexing of tax and benefit is also profoundly affected by any adjustment to the inflation measure. There is thus a powerful incentive to the Treasury to eliminate any upward bias in the figures.

New name, same old problems at British Gas

British Gas will be hoping that a new name marks a new beginning, but for Sid the misery goes on and on. Investors were given a lot to take in yesterday with a whole string of announcements, not least the new name for the supply business, "Centrica". Directors say this was easily the best of three possible choices by the leading marketing consultancy, Interbrand, which was paid pounds 250,000 for its services. In truth, Centrica is no worse than any of the other recent rebranding exercises. Who thought much of the name "Zeneca" when ICI unveiled it a few years ago? "Concert", the new name for British Telecom, hardly sets the pulse racing either.

But behind the new facade, the same old problems remain. Centrica's first task is to restore public confidence in service standards as well as attempt to field the onset of competition in its core domestic supply business. The new board, assisted by a sensible choice of non-executive directors such as WH Smith head Bill Cockburn, will undoubtedly work like mad to keep the company's market share above 50 per cent. Even so, Centrica shareholders will have to wait a very long time for their first dividend.

Which leaves "BG PLC", the pipeline operation entangled in a bitter row with Ofgas over pipeline charges. If it loses in the Monopolies Commission lottery, then the company claims it would wipe pounds 400m off after tax profits. Last year it only made pounds 391m after tax, so Sid can kiss goodbye to much of a dividend there as well. Even if BG comes off better than expected, the dividend is still going to be cut.

So it was no surprise that yet again yesterday British Gas was playing down any possibility that the demerger will realise additional value for shareholders in the near future. Who knows? British Gas's screams of pain may be little more than bluff, the case as presented for consumption by the MMC. Perhaps there are huge hidden costs which can be cut out, unlocking real value for shareholders. Then again, look what happened the last time British Gas slashed staff numbers; too many people left and service standards suffered. The shares may look oversold for the moment, but Sid is going to have to wait quite a while to see them return to anywhere near their former glory.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want it for the fitness tech, or for the style
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own