Lawrence Churchill, chairman of the Pension Protection Fund, seems to have forgotten the first rule of holes: when in one, stop digging.
Inevitably, the first-year levy for the PPF turns out to be much higher than the Government said it would be. At £575m, it is nearly double the original estimate, and even that's unlikely to be enough. The pension liabilities dumped on the fund thus far already amount to some £600m including Turner & Newall, which will be joining shortly. Meanwhile there's a queue as long as your arm building up at Mr Churchill's door.
Yet in attempting the address the legitimate concerns of well managed and resourced pension funds, Mr Churchill has only created a timebomb of new difficulties for himself.
Only 20 per cent of the levy is to be flat rate, based on the size of the fund's liabilities. The balance comes from a so-called risk based levy, which will be assessed according to the size of the fund's deficit and the creditworthiness of the sponsoring company. Particularly well resourced companies can escape this element of the levy altogether by ensuring that liabilities are funded 125 per cent. One cheer for that.
By making the levy largely risk based, Mr Churchill has reduced the risk of moral hazard, under which the strong would be forced to subsidise the weak, and created an incentive for companies to deal with their pension deficits.
But he has also increased the likelihood of liability for the levy being concentrated among those least able to afford it. Those who can will pay off their deficits so as to avoid the levy, leaving an ever higher percentage of the levy to be imposed on an ever narrower base of weaker companies. As John Ralfe, a pensions consultant with RBC Capital Markets, observes, this is simply not sustainable.
Eventually, liability to the levy will either have to be widened, or compensation benefits will have to be cut.
The PPF is a well intentioned enough piece of reform whose purpose is to safeguard the interests of hapless pension fund members when their sponsoring company goes bust. Yet it suffers from the law of unintended consequences. By attempting to shore up the system of occupational pensions it only further discourages employers from offering them. They scarcely need more by way of disincentive, yet the new levy provides it by the bucket load.
Monstrous quango threat in Turner plans
I'm less and less convinced of the merits of the National Pension Savings Scheme (NPSS) proposed by Lord Turner's Pensions Commission. The idea is fine in principle; in practice it threatens to create a quango of monstrously inefficient proportions whose costs are highly likely to end up being financed by the taxpayer.
Few would quarrel with the principle. Most people say they would save for a pension if they were forced to, so Lord Turner has come up with the idea of auto-enrollment, a sort of compulsion lite where employees are automatically enrolled in the NPSS unless they specifically decide to opt out. The employer would contribute 3 per cent, and the employee 5 per cent. The Pensions Commission hopes to keep costs to a minimum by administering the scheme through the PAYE tax system.
One of the chief complaints about private pension provision, particularly for the low paid, is that too high a proportion of the amounts saved ends up getting gobbled up in fees. Keep the fees to a bare minimum and the accumulator effect of saving over many years should be capable of delivering a worthwhile pension in retirement even to those contributing quite small amounts of money.
Yet I doubt in practice that the costs would be as small as Lord Turner anticipates. Theoretically, the costs should be marginal if the sums are collected through the PAYE system, but the collection is only the half of it. The money then has to be delivered in a timely fashion to whatever fund manager the employee has chosen. Meanwhile, a massive new bureaucracy and IT system would need to be set up to administer and keep checks on the millions of individual accounts the scheme would create.
Anyone who has had to deal with the tax authorities, where tax codes are wrongly allocated all the time, necessitating months of correspondence and costly corrective action, knows that an efficiently run, low cost NPSS is extraordinarily unlikely. Just look what's happened with tax credits, where the taxpayer has had to fork out billions for overpayments which the revenue now finds impossible to recover.
As it happens, the main cost in pensions provision as it stands is that of sales regulation, or ensuring that the product is being appropriately sold. By setting the employers' contribution at 3 per cent, Lord Turner assumes the scheme will be able to bypass this high cost regulation. No one could claim they had been mis-sold their pension when, taking account of the tax break, they are getting about half the money contributed from someone else. Ergo, costly FSA sales regulation wouldn't need to be applied.
What then would become of private pension provision? In all but the cases of large occupational schemes and high income individuals, it might find itself at such a competitive disadvantage that it couldn't possibly co-exist. Yet remove the regulatory burden, and the private sector may well be able to reduce fees to something close to the 0.3 per cent annual management charge envisaged by Lord Turner for his NPSS.
Arrangements put in place for stakeholder pensions, which all employers are obliged to offer, mean that the systems for providing just such a private sector solution to the problem already exist. In such circumstances, the creation of a new state bureaucracy to manage the NPSS just looks like a monumental waste of money.
Barely a protest as gas prices rise again
The heat is on Sir Roy Gardner, but not half as much as it will be next year when the chief executive of Centrica moves on to take charge at the can of worms otherwise known as Compass. Talk about out of the frying pan, into the fire.
As it happens Sir Roy is beginning to manage the thermal dynamics of the said frying pan which is Centrica with some skill. Yesterday Centrica warned the 17 milllion customers of British Gas to expect yet another hefty increase in bills in the new year, and yet it provoked barely a whimper of protest.
The best that Energywatch, the consumer watchdog, could come up with was a ten-point plan for saving energy this winter and an exhortation to energy suppliers to do all that they could to protect the elderly and vulnerable.
How different from a year ago, when the consumer lobby went positively apoplectic over the increase in British Gas bills and called on customers to defect en masse.
They did so. Sir Roy lost more than one million accounts. Yet for many of those customers, it made little difference. It was no time at all before other suppliers were following Centrica's lead, and whacking up their own prices too.
Gas users seem to have learnt from the experience. Despite a 14 per cent increase in bills in September, British Gas suffered a net customer loss of only 160,000 in the second half of the year. That was because everyone else has been increasing their tariffs too. Some were head of British Gas, some came later. The sting has been taken out of the latest warning of price rises by the fact that Npower and Scottish & Southern have already announced that their bills will be going up in January.
Soaring wholesale gas costs, which make up about half the average domestic bill, affect all suppliers and have to be paid for by someone. To reflect the steep rise in wholesale gas prices fully, British Gas would have been justified in raising domestic bills by nearly a half. But Sir Roy has learnt that it is better to absorb some of the pain if it means hanging onto more customers who can then be sold everything from boiler breakdown insurance to domestic appliance cover. Perhaps somewhere in all of this there is a lesson for Compass.Reuse content