Jeremy Warner's Outlook: Flaws at the heart of Britain's new pensions compensation system give cause for concern

Offshoring is a fact of life: get used to it; Amvescap finally bags its man
Click to follow

Perhaps inevitably, the Government's new pensions protection fund (PPF), designed to underwrite the pension rights of employees in companies that become insolvent, looks as if it will end up costing a great deal more than originally anticipated. Lawrence Churchill, the PPF chairman, conceded as much this week when announcing details of the risk-based levy the fund intends to impose on final salary pension schemes.

According to one consulting actuary, it would cost approximately £1bn a year to provide the safety net envisaged by the PPF if the risk were insured in the private sector. The PPF originally anticipated a first-year levy of just £150m, rising to £300m per annum thereafter.

Mr Churchill cites greater longevity and lower interest rates as the reason for demanding more. Just a few months old, the fund is also clocking up liabilities at an alarming rate. Both the Turner & Newall and Rover pension schemes are already heading towards the PPF's warm embrace.

More alarmingly, the pensions regulator has indicated that the PPF might also assume liability for the final salary schemes of companies which are not yet bust but might become so if the fund doesn't take these obligations off their hands. The test is whether jobs are thereby saved.

It is just such a policy which has brought the older US equivalent to the PPF, the Pension Benefit Guarantee Corporation, to its knees. Now sinking under $62.3bn (£36bn) of liabilities, the US protection fund recently agreed to take on $6.6bn of additional liabilities belonging to United Airlines, thereby saving the company $645m a year in pension costs and helping to return the airline to profit.

The United Airlines action threatens a domino effect in which other airlines are forced to seek bankruptcy protection to bring their pension costs down to United's level.

Nor is this the only warning for our own PPF from the other side of the pond. In an effort to stop these liabilities bouncing back on the taxpayer, law makers are urgently drafting legislation which would substantially increase the premiums other, more solvent pension schemes have to pay to support the protection scheme.

Under the proposals, even relatively healthy funds would end up paying both a higher flat rate contribution and a higher variable rate premium to reflect the fact that they are not deemed to be fully funded.

Back in the UK, the PPF is intending to levy contributions according to the credit worthiness of the sponsoring company. Financially unsound companies with poorly funded pension arrangements will pay more than obviously solvent ones with well-funded schemes. To address the possibility that this in itself might help tip less secure companies over the edge, the PPF intends to cap these premiums at 3 per cent of liabilities. For many smaller companies, even that is going to seem too high.

Plainly something had to be done to address the problem of pension scheme members who are left high and dry when their companies go bust.

But it is not yet clear that the PPF was the right approach, for it seems to act only as a further deterrent to providing final salary pension arrangements in the first place. In attempting to patch up the final salary pension system, the Government has only succeeded in making a bad situation worse.

One alternative approach might have been to place an obligation on employers to insure their pension schemes against the possibility of default. This would neatly get round the problem of moral hazard implicit in the current arrangements where the solvent are made to subsidise the insolvent.

It would also plainly be much costlier for companies with big deficits and poor credit ratings, but then the harsh truth is that those who cannot afford to run final salary pension arrangements shouldn't be doing so.

Offshoring is a fact of life: get used to it

Unions reacted with understandable dismay to news yesterday that British Gas, part of Centrica, is axing 2,000 British jobs, of which about a half are to be "offshored" to India. Sadly, they are fighting a losing and pointless battle. Offshoring is a fact of modern business life. Those that refuse to play the game stand to become progressively less competitive. Uncompetitive companies cannot afford to invest in the jobs of the future.

Yet perhaps the more interesting aspect of this story is that there are no service jobs being offshored. Anything that involves interfacing with the customer, including the company's call centre work, is to remain firmly rooted in the UK. This marks a growing trend in the pattern of offshoring, with many companies opting to retain their call centre work in the UK, but outsourcing growing quantities of back-office admin to India and elsewhere.

However well the call centres of India train their staff, or tutor them in our British ways, the cultural differences and knowledge base is often just too different to allow for expected standards of service. Some British companies that have offshored these functions are already bringing them back. Data processing, however, where the labour cost savings can be more than 50 per cent, is a different matter.

Offshoring is not about to go away. Despite concerns over security and quality of service, the savings are too big for all but the most loyally British of companies to ignore. What we've seen so far is as nothing compared with the deluge of offshoring that is still to come.

The Chancellor's Budget arithmetic already looks questionable enough, but to the extent that it works at all, it is entirely dependent on achieving big improvements in public sector efficiency. Without those improvements, planned increases in spending on frontline services won't be affordable.

In an effort to meet these efficiency targets, large chunks of public sector work will be outsourced, and some of this will be offshored. One organisation which hopes to benefit from this trend is Capita, the company behind London's congestion charging system.

According to Capita's chairman and founder, Rod Aldridge, the British market for outsourcing could be worth as much as £65bn a year, split evenly between the public and private sectors. How much of this is capable of being offshored is another matter, but it is bound to be considerable. The Government faces a testing time in weighing the monetary benefits against the likely political fallout. Is No 11 as committed to efficient government as it says? We'll see.

Amvescap finally bags its man

Amvescap, the Anglo-American fund manager, has come up trumps with the appointment of Marty Flanagan of Franklin Resources as chief executive. Few expected the still-dominant Charles Brady, who last year agreed to split the roles of chairman and chief executive, to be able to attract someone of Mr Flanagan's calibre. So how come the shares went down? Amvescap is the subject of a bid approach from CI Financial, a smaller, Canadian fund manager. This was never credible in the first place, but Mr Flanagan's appointment presumably makes it less so. It looks as if CI pounced about three months too late.