Anthony Hilton: Instead of complaining about Europe, we should become more engaged

 

Wednesday found me in the elegant surroundings of Saddlers Hall in the City taking part in the annual Candlewick Debate – an event organised by Fiona Woolf of law firm CMS Cameron McKenna. Candlewick is the ward which she represents on the City Corporation.

Every financial crisis since the beginning of time has brought forth regulation designed to stop it ever happening again – inevitably with limited success – and this one is no different. So the point of the evening was to explore what combination of externally imposed regulation and internally imposed ethical standards and competitiveness would best allow the financial services sector to survive and prosper in the future.

There is always a danger that these events turn into a rant against the European Union and the torrent of legislation being developed there which seeks – probably in vain – to exert a much greater degree of oversight and control over the workings of the financial system.

Much of what is proposed will be costly, disruptive and force major changes in methods of working, probably without delivering the desired increase in safety, so the worry is real.

But the issue which no one seems willing to grasp is that complaining is not going to help; we have to get much more deeply engaged in Brussels and build alliances, so that we can win respect for our views. Only then can we hope seriously to influence the debate.

Instead we are reaping what we have sown.

Given the noisy relish with which too many Tory Eurosceptics have celebrated each downward lurch in the euro crisis, coming on top of decades of negativity from senior political leaders and a dogged refusal by the civil service to encourage its high fliers to see time in Brussels as an essential part on their career path, we really should not be surprised if there is a desire over there to stick it to the Brits – the more so because the financial crisis is very much seen in continental capitals as having been brought about by the excesses of Anglo-Saxon capitalism.

It is going to be a long haul back. Yet there seems to be precious little understanding either in Government or in the City on the need for, let alone the scale of, the task.

Accountants' approach to pensions doesn't add up

Over the last 20 years we have destroyed one of the best pension schemes in the Western world by allowing the accounting profession to insist that we assessed risks which were largely irrelevant and then set aside funds to meet them.

When I first became a pension trustee 20 years ago, pension funds were judged by their cash flows. Actuaries calculated how much money would be needed to pay the pensions when they fell due and then judged whether the fund was likely to generate enough income now and in the future to be able to meet its obligations. Fluctuations in the size of the fund as the market moved up or down could be largely ignored.

It was similar to buying a house on a 30-year mortgage. The two things which matter are first that the house provides the benefit you need in terms of suitable accommodation now and into the future, and second that you can meet the cost of this benefit by having sufficient income to meet the monthly mortgage payments. It may be disquieting, but it does actually affect these key issues of benefit and cost if prices crash at some point so the house is valued at £50,000 less than you paid for it.

But the accountants decided it did matter, and in fact that it was the only thing that mattered.

The effect of the mark to market rule for pension funds was that yearly fluctuations in the size of the fund were stuck into the sponsoring company's accounts as a liability which it was then expected to make good.

Returning to the analogy with housing, it was as if in addition to keeping up with the mortgage payments you had also to come up with £50,000 to cover the negative equity. The accountants' justification for this was that you might lose your job tomorrow and not be able to keep up the payments, in which case you would lose your house and have to make good that £50,000 shortfall – so you had better provide for it now, just in case.

Companies have found it as hard to meet that "negative equity" cost of pensions as a homebuyer would, and that is why most of the private sector-defined benefit schemes have been closed. That is the damage which gets done when people focus on market fluctuations rather than economic reality. An entire pensions system unnecessarily destroyed.

This thought was prompted by a lecture at the Cass Business School this week by Lord Turner, chairman of the Financial Services Authority, in which he once again said that one of the principle causes of the financial crisis was the use of mark to market accounting in banks. The reason was it meant temporary fluctuations in prices rather than underlying economic reality became the dominant driver of behaviour – which was great in the boom but left the system defenceless in the bust.

Just to depress you totally, an old friend, Brian Reading of Lombard Street Research, this week produced a paper which sought to put some numbers on the cost of this economic downturn. He, more than anyone, would stress that his numbers are guesses and estimates not facts, but with that caveat he is better equipped than most to make such guesses.

He says the cumulative loss of output – how much we have produced between 2006 and now compared to where we think we would have been without the crisis – is the equivalent of 39 per cent of GDP.

GDP can be thought of as the national total of all our individual incomes. So if you want a crude but emotive measure of what this crisis has cost you personally, then it is 39% of your gross income for this year. Four tenths of one year's income down the drain.

Finally, and quite separately, there has been a howl of protest from sections of the accounting profession following the unveiling this week of proposals to streamline the working of the Financial Reporting Council. One consequence of this would be that the profession could no longer be solely responsible for setting accounting standards.

In the light of the above, I would have thought such a move comes not a moment too soon.

a.hilton@independent.co.uk

Voices
Hunted: A stag lies dead on Jura, where David Cameron holidays and has himself stalked deer
voicesThe Scotland I know is becoming a playground for the rich
News
Russell Brand has written a book of political analysis called Revolution
peopleFilm star says he is 'not interested in making money anymore'
Arts and Entertainment
Benedict Cumberbatch has refused to deny his involvement in the upcoming new Star Wars film
filmBenedict Cumberbatch reignites those Star Wars rumours
News
newsMcKamey Manor says 'there is no escape until the tour is completed'
PROMOTED VIDEO
Arts and Entertainment
Jessica Chastain during an interview in Los Angeles.
filmsOscar hopeful Jessica Chastain reveals the secret to her breakthrough success
News
people

Britain First criticised for using actress's memory to draw attention to their 'hate-filled home page'

News
news
Life and Style
Meow! ... Again, Kim Kardashian goes for a sexy Halloween costume, wrapping her body with a latex catsuit and high heeled knee boots
fashionFrom Heidi Klum to Kim Kardashian
News
news

Emergency call 'started off dumb, but got pretty serious'

Arts and Entertainment
On The Apprentice, “serious” left the room many moons ago and yet still we watch
tv

Greatest mystery about the hit BBC1 show is how it continues to be made at all, writes Grace Dent

News
ebooksAn unforgettable anthology of contemporary reportage
News
i100
Arts and Entertainment
JK Rowling is releasing a new Harry Potter story about Dolores Umbridge
booksChristmas comes early for wizard fans
Arts and Entertainment
filmsOculus Rift offers breathtakingly realistic simulation of zero gravity
Sport
footballAccording to revelations from Sergio Aguero's new biography
Life and Style
tech

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Data Analyst/Planning and Performance – Surrey – Up to £35k

£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker