Business View: Pensions are a pain but they're better than shoeboxes

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The Independent Online

When the euro was introduced, one of the biggest problems was the sudden emergence of billions of deutschmarks, lira, francs and pesetas that people unearthed from shoeboxes under their beds and brought to their local banks to exchange.

How the economists, policymakers and general know-it-alls tut-tutted. "What sort of way is this to save for your old age?" they said. The British, in particular, were smugly pointing out that we were saving into personal pension plans, PEPs and ISAs, which surely were far better than stuffing cash under the mattress. But, after last week, you wonder who is laughing.

The combination of the Penrose report into the collapse of Equitable Life and the Treasury Select Committee report into endowment mortgage mis-selling would be enough to persuade most people that they should have nothing to do with the long-term savings industry. You find that Equitable executives hid what they were up to from the board of the life company - never mind the policyholders - for nearly 10 years. Some of our most respected savings firms gave sales people incentives to stuff unsuitable products down punters' throats. This would have been bad behaviour if they were selling carpets or cars. But they were selling people's futures.

Then the truth dawns on you. There is no alternative but to deal with these companies. The Government, rightly, gives you a tax break to save for your retirement. However, this tax break only applies if you save in an approved way - with your company pension scheme, or with a savings plan run by the sort of company being hauled over the coals last week.

As I pointed out a few weeks ago, company pension schemes are looking tired and difficult to administer. Then I suggested they should be scrapped in favour of getting employers to pay into the pension plans of employees.

But to make this work, you have to give employees choice on how to save. If they do not want to put their retirement money into the stockmarket, why not have approved plans for investing in property, or even for putting it into a savings account at the bank? It's better than a shoebox.

Widow's dead weight

How much has Scottish Widows cost Lloyds TSB? There is the £7bn it paidfor the business just under five years ago. Then there are the fines and compensation payments for mis-selling of things like precipice bonds and endowment mortgages - a bill, so far, of around £300m (though some of this relates to the Abbey Life business Lloyds TSB bought a few years ago), and probably another £500m to come.

Then there is the extra capital the bank is having to pump into its insurance business. A close study of last week's figures will not tell you how much is in there. But I bet a shilling to a dollar that the fact that Lloyds TSB disappointed the markets last week by not handing out some of the windfall it got for its New Zealand and Brazil operations is down to the new Realistic Reporting regime for insurers, rather than the new Basel II capital requirements for banks.

And finally, there is the lost opportunity cost. The dead weight of the Widow, and the worries that its capital needs will swallow part of Lloyds TSB's dividend, has held back the bank's shares and given it less freedom to pursue the group's traditional activity of buying rivals and squeezing the pennies out of them. Lloyds TSB may still buy Egg, but it is a small transaction by its terms, and isn't really going to bring much to the party.

Lloyds TSB turned down the chance to ditch the Widow in a £5bn deal offered by the Pru last year. It was probably too early in the new reign of Eric Daniel to take the pain. But with neither of the architects of the original deal - ex-Lloyds TSB boss Peter Ellwood and former Widows chief Mike Ross - still at the bank, a similar offer made today would be rather tempting.