Jeremy Warner's Outlook: Lord Turner has won the battle for pensions reform, but can his plans be made to work?

LSE: more reasons for rejecting Nasdaq; Time to set Britain's airports free
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The Independent Online

Game, set and match to Lord Turner. In its pensions White Paper yesterday, the Government came down unambiguously in favour of the state-administered National Pensions Savings Scheme (NPSS) proposed by Lord Turner's Pensions Commission. This deals a crushing blow to the insurance industry, which has been furiously lobbying ministers to run the promised millions of individual savings accounts itself.

Yet unless the delivery authority charged with sorting out the detail performs an abrupt U-turn, the alternative private sector solution now seems to be wholly off the agenda. There's some comfort for the insurance industry in proposals to allow savers to opt for branded investment products in preference to default or bulk-negotiated funds.

The Government will also bar attempts to move existing pension pots into the state scheme. Yet these are slender concessions for the insurance industry to cling to. To all intents and purposes, it has been frozen out, this despite the fact that the Government's wholly misconceived stakeholder pension initiative has already obliged the industry to put in place the systems for administering the sort of personal savings accounts now proposed.

The Pensions Commission has argued all along that it is only by removing the marketing costs clocked up by the private sector in selling pensions that charges can be made low enough for worthwhile saving by low earners. Ministers have accepted Lord Turner's logic.

Is the Government right to go this route? Philosophically, it is hard to find fault with the approach adopted. Lord Turner's proposals were carefully thought out and cogently argued. It is in the practice that the doubts multiply.

If there has ever been a public sector IT project in Britain which hasn't been catastrophically mismanaged then it is hard to recall what it was, and this one will by any standards be a monster of a system. To judge by the National Health Service records contract and numerous other public sector IT projects, the White Paper's assertion that the NPSS can be done for an initial charge of 0.5 per cent, falling to 0.3 per cent or less over time, looks like little more than fantasy. Either that, or the true costs will get hidden within other public expenditures.

Most public policy on pensions has been a catalogue of errors which seems only to have demonstrated the truth of the law of unintended consequences. The more the Government has meddled - most of it well intentioned enough - the worse the system has become. Attempts to patch up one part of the pensions landscape only damages the rest until the whole thing descends into the hopeless muddle we see today, where tens of millions of people don't bother to save for retirement at all.

It is this vacuum in pensions provision that Lord Turner's proposals attempt to address. Despite some obvious drawbacks, they largely succeed, at least on paper. Can the costs be made as low as is necessary to deliver a worthwhile pension in retirement for people saving relatively small amounts?

As I say, there is good cause for scepticism. Yet Sweden has succeeded with something similar, so it is not impossible. And what of the point much touted by the Liberal Democrats, that by saving into the NPSS many low earners will only be depriving themselves of means-tested state benefits, laying the Government open to the charge of mis-selling?

Without raising the basic state pension to a level where means tested benefit becomes redundant - a hugely costly exercise - there will always be some who are caught in this trap. Yet it is likely to be a comparatively small number. According to the Department for Work and Pensions, less than 10 per cent of pensioners by 2050 won't see any benefit at all if they save through the NPSS.

That compares to the 70 per cent of pensioners who it is reckoned will be on means-tested benefit by then if things are left as they are. The greater good achieved surely outweighs the small number who are disadvantaged. Most people will be significantly better off by saving through the NPSS than they would otherwise be.

All the same, there is plainly a risk that once savers realise they may be depriving themselves of state benefit they will opt out and much of the purpose of the NPSS would be lost. Looked at cynically, the Government has only backed the NPSS because it sees in the scheme a way of making people save for a benefit that would otherwise have to be provided at possibly unaffordable cost by the state. Lord Turner may have won the battle, but it may still be unwise to bet on the outcome of the war.

LSE: more reasons for rejecting Nasdaq

Bid battle offer documents are usually only a formality, more interesting for the tittle-tattle of previously unreported litigation and directors' interests than for any light they might cast on the bid situation. Yet there are a couple of genuinely new points to be had from the documentation on Nasdaq's previously announced £12.43-a-share offer for the London Stock Exchange (LSE).

One is that Nasdaq has reduced the level of acceptances at which it would declare the offer unconditional to just 50 per cent, from a previously announced 90 per cent. Since the company already owns 29 per cent of the LSE, it now only needs another 21 per cent to win. This might put pressure on the LSE board to talk. Nasdaq has already declared its offer final, but it could go higher if LSE directors agree terms. With around 30 per cent of the register held by hedge funds and other short-term traders, there is plainly a risk that the company could be sold to Nasdaq from under the board's nose.

The downside of going unconditional at 50 per cent is that Nasdaq might be left with an obstreperous minority which would make it impossible to consolidate the company or draw on the LSE's cash flow to finance the debt mountain being used to buy it. So it is a high-wire act Nasdaq is performing, made all the riskier by the second somewhat startling piece of news to be drawn from the offer document.

This is that basically Nasdaq cannot afford to pay more, or not on the structure of capital as presently envisaged. In the 15 pages of "risk factors" attached to the document, Nasdaq admits that the high levels of debt it is taking on to bid for the LSE may "impair operation of our business" and place it at "a competitive disadvantage" to rivals.

In other words, even the company itself admits to the extraordinarily high degree of risk it runs by taking on so much debt to mount its bid. Never mind the niceties of whether the offer undervalues the LSE or not, it almost certainly puts the future of the company in danger.

What's more, the Nasdaq chief executive, Bob Greifeld, has already as good as admitted that he's opposed to the stock exchange's Alternative Investment Market (AIM). The assumption must be that he'd pull out of this direct competitor in the market for high-tech listings if he succeeds in taking over the LSE. AIM has been enormously good for the City, generating billions in fees, but it makes hardly any money for the LSE.

Curiously, it has taken the London mayor, "Red" Ken Livingstone, to raise the alarm over this threat to London's position as a financial centre. The Government meanwhile hides behind a pathetically inadequate change in the law which might allow the Financial Services Authority to intervene if AIM or anything else is sacrificed to Nasdaq's wider purposes. In practice, it is virtually always impossible to make the owners of a business do something they perceive to be against their own self interest. Continued support for AIM may be one of those things.

Time to set Britain's airports free

The reference to the Competition Authority of the BAA airports monopoly was widely expected, but it is no less welcome for that. The sooner BAA is broken up into its constituent parts, the better it will be for airline users and passengers alike. Now that cross-subsidy between airports is banned by the regulator, no economic purpose is served by keeping them together. Only once they have been set free can prices and capacity find their proper, market-dictated, levels.

j.warner@independent.co.uk

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