David Prosser: Putting a cap on the cost of pensions both present and future

Outlook: If you retired a decade ago, the chances are you will live for three years longer than your employer had expected to have to pay you a pension

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The Independent Online

Having done their best to limit future pension liabilities, Britain's biggest companies are now turning to the liabilities they have already accrued. ITV's longevity swap with Credit Suisse is one of the largest deals of this type ever done in Britain, but it represents an important trend that is set to accelerate.

As employees of once-generous companies now know well, it isrelatively straightforward for employers to stop building up large liabilities to final-salary pension schemes: they simply close them – either to new joiners, or as increasingly has been the case, to existing members of the plan too.

Getting rid of the final-salary pension plan does not, however, mean that the company's bill becomes a known quantity in perpetuity. For the cost of providing those benefits that have already been promised to staff can be very changeable, depending on a series of variables.

ITV's deal is an attempt to get on top of just one of those variables, albeit an especially pernicious one. It reflects the fact that for finance directors of companies with final-salary pension schemes, the inexorable rise of people's life expectancies in Britain todayrepresents a headache.

If you retired a decade ago, the fact that you are, on average, likely to live three years longer than your employer expected is welcome. It is not such happy news, however, for a company that had not anticipated having to finance your retirement for quite so long.

That risk is one that ITV no longer has to worry about – its deal with Credit Suisse means the bank will take the hit should longevity rates rise more quickly thananticipated in future. That's not to say ITV will save money from the arrangement, but it has at least drawn a line under the cost of its liabilities – or one part of them, anyway.

We will no doubt see more deals of this type, as companies opt to pay a premium for certainty. The £1.7bn of liabilities covered by ITV's deal with Credit Suisse takes the total value of longevity swaps agreed over the past two years to almost £9bn.

That pooling of liabilities in the hands of a small number of investment banks comes with its own dangers, of course – the obvious one being that this may become another systemic risk with which UK regulators will have to get to grips.

That is a matter both for thePensions Regulator and the new watchdogs that are responsible for financial stability and institutional supervision.

There is also the question of what to do about the other moving parts in the liability formula – not least investment risk. But there are solutions available to address these issues too. Finally, what has seemed for so long like an intractable problem for many companies feels much less so.

The City can't help itself on tax

Here we go again. As day follows night, so the howls of outrage in the City are inevitable at the mere hint of any increase in their tax bills. So it was that Michael Spencer, the chief executive of interdealer broker Icap, told The Independent on Sunday that his business, for one, may be off if the European Union adopts the proposals of Nicolas Sarkozy and Angela Merkel for a financial transactions tax.

Never mind that we have yet to hear the detail of those proposals – or that it is highly probable George Osborne would veto them (he is on record as opposing such a tax unless it is worldwide). No, Mr Spencer is already hopping mad.

Clearly, there are significant problems with the French-German ambition for this tax, not the least of which is the danger of cross-border arbitrage. There really isn't going to be much point in introducing the levy if a sizeable number of those it is aimed at decamp to somewhere where it isn't payable.

However, the European Union – and not just the eurozone – is confronting a crisis in its public finances. President Sarkozy and Chancellor Merkel believe this tax could raise as much as $215bn (£131bn) a year, so it would be dumb not to at least give their ideas a fair hearing.

Moreover, the speed with which the financial sector – and Mr Spencer's reaction is absolutely typical – rushes to reject every suggestion of changes to regulation or taxation does it no credit. Not only does it reinforce the views of those who think that financiers are unwilling to pay their way – however unfair that perception might be – but it also undermines the credibility of their argument.

The banks, for example, have remained in the UK despite the banking levy, despite the bonus tax and despite the 50p top rate of income tax, though there were threats they would leave prior to each of these measures being introduced.



Chaos still reigns in the eurozone

The bounce in the stock markets yesterday came courtesy of the developments in Libya – but do not assume it will prove to be the beginning of a sustained rally.

On the slowing recovery in the US and elsewhere, the speech that Ben Bernanke, the chairman of the US Federal Reserve, will give on Friday, is all-important, as Stephen Foley explains on page 29.

In the eurozone, the chaos goes on: it's not just that Europe's leaders can't agree on what to do next – they can't even agree on what they have already agreed.

Ewald Nowotny, who runs Austria's central bank, warned yesterday that rather than the volatility of the past two weeks speeding up the drive to ratify the changes agreed last month to the European Financial Stability Fund, the process is slowing.

He's worried the eurozone won't even manage to hit its end-October target. So much for the political leadership that is being called for by investors all over Europe.

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