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'
Friday 06 December 1996
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.
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