The problem with the pensions timebomb is that by definition, it is a problem for the future, not the here and now. This makes governments extraordinarily reluctant to address it in any meaningful way.
The problem with the pensions timebomb is that by definition, it is a problem for the future, not the here and now. This makes governments extraordinarily reluctant to address it in any meaningful way, as any such attempt is almost bound to involve an immediate cost in the form of higher taxes, or at least the prospect of them. The easiest political option is to let sleeping dogs lie. When eventually they awake, it will be someone else's problem.
If a political consensus could be developed around what needs to be done, then perhaps the Government might act. Predictably, no such consensus looks like emerging. To the contrary, pensions are fast becoming one of the biggest political footballs of our time. Most of the debate is conducted in the realm of ideology, so I'm not sure what impact it has on the voters.
None the less, you hardly need to be a brainbox to figure out that the present policy mix is a complete shambles. That a Labour government seven years into its tenure has failed to see and address this is a complete mystery. Only a cynic would suggest a dastardly purpose - that the Government hopes to make us all so dependent on benefit that eventually we'll have no option but to carry on voting Labour. The other political parties have been quick to recognise the potential for political capital. Belatedly, Number 10 has woken up and smelt the coffee. Out goes the hopeless Andrew Smith from the Department for Work and Pensions, and in comes...we don't yet know, but presumably someone a little more effective.
Yesterday, it was the turn of the Liberal Democrats to deliver their own prescription for the growing pensions crisis, and not a bad stab at the problem it was too. The fundamental fault in the Government's approach is that it has undermined its own confused efforts to persuade people to save more with a means tested benefits system which makes savings completely pointless for all but the better off.
Personally, I think it wrong to encourage the lower paid to save at all. By saving, the low paid further diminish already meagre disposable income for the addition of little future benefit. Most long term savings institutions regard the price capped premiums the Government insists upon as too small to be worth marketing to such people, and in any case live in fear that the FSA will eventually accuse them of mis-selling if they do. But means testing, or targeted benefit, is the wrong way of bridging the gap.
The Lib Dems propose to rectify the problem by raising the basic state pension - to be renamed the Citizen's Pension - to the level of the present, means tested minimum income guarantee and then indexing it to earnings. This would give everyone a guaranteed income of about 20 per cent of average earnings. That's still barely a living wage, but it does get rid of the disincentive to save. Anything saved would be an added bonus, and wouldn't count, as it now does, against benefit.
Only one problem. The cost. The Lib Dems reckon that by initially restricting the Citizen's pension to the over 75s, they could limit the cost to £2.7bn in the first year rising to £3.2bn a year by the end of the parliament. However, the eventual aim is to apply the policy to everyone beyond the age of 65. This would raise the first year costs to an eye watering £11bn. The Lib Dems propose to pay for this by getting rid of the second tier state pension (the old Serps) and by abolishing the National Insurance rebate to those who have opted out.
With an ageing population, the longer-term costs will, of course, eventually be even higher. Yet according to predictions by the Institute for Fiscal Studies, about 80 per cent of pensioners will eventually be on the means tested minium income guarantee in any case if things are left as they are, so the difference might not seem very great.
David Willetts, the shadow Work and Pensions Secretary, proposes a variation of this idea in seeking to index the basic state pension to earnings while leaving the minimum income guarantee (MIG) indexed only to general price inflation. The effect would be that the basic pension would eventually catch up and overtake the MIG, making it redundant. The merit of the Willetts proposal is that it would be a lot cheaper than what the Lib Dems are proposing. The downside is that those relying entirely on the state pension would be left without a living wage, as the basic state pension would remain the same relative to earnings as it is now.
Still, whatever their drawbacks, both approaches would seem to have more to commend them than the present hotchpotch of contradictory policy initiatives. Adair Turner, chairman of the Pensions Commission, is due to publish his interim report on the pensions crisis shortly. He's a clever man, with as good an understanding of the issues involved as anyone on the planet, but I'll eat my hat if he can produce a political consensus.
¿ Auditors' liability
On Saturday, I predicted further vacillation from the Government on the issue of limiting the size of auditors' liability to catastrophic loss, and that's precisely what we got. Patricia Hewitt, the Trade and Industry Secretary, has ruled out the idea of capping in its entirety and is ordering yet another review into whether a system of proportionate liability via contract is practical or desirable. We've already had a near year long review on capping. Is it really necessary to have another on proportionality, under which auditors would pay compensation proportionate to their share of culpability?
Auditors only suggested the idea of capping because of Treasury concern that the principle of joint and several liability would be infringed by proportionality. Now we seem to have gone full circle back to where we were before. No wonder no one could quite work out yesterday whether the Government was opening or closing the door to reform. Ernst & Young found the statement deeply disappointing. KPMG, on the other hand, welcomed it, this on the grounds that the Government does at least seem to be open to persuasion.
To be fair, auditors' liability was never going to be high on any minister's list of priorities. There are few votes in it, the present system seems to work relatively well, and so far at least, no audit practice of any significance has been put out of business by being made liable for catastrophic loss. Arthur Andersen, the firm responsible for the Enron audit, was sunk by damage to reputation well before the lawyers could get at it for financial liability.
None the less, the case for reform has become an urgent one. Auditors find it virtually impossible to get worthwhile liability insurance nowadays, and their insistence that they will quit high risk companies if nothing is done is no idle threat. As things stand, it is only the big four that are large enough to withstand a catastrophic claim. Not with standing what the Office of Fair Trading has said on this issue, any limit on liability would quite plainly be a boost to competition, by encouraging more small and medium sized accounting firms into the audit market for larger companies.
The idea of proportionate liability has already been recognised in the US and Australia without any obvious adverse consequences. Capping was never going to be a runner, but properly constructed, proportionality ought to be something on which everyone can eventually agree.
Evidence of the deep malaise that has overcome Shell in recent years is not exactly thin on the ground, but there are few better examples of it than the success of the one-time oil minnow, Cairn Energy. Confirmed last night as the latest addition to the FTSE 100, Cairn owes its recent success largely to the Indian oil prospects it bought from Shell a few years ago. Bill Gammell, the chief executive, doesn't like to gloat, but the contrast between finely tuned risk taker, willing to back his hunches and judgment with real money, even though he could ill afford to lose it, and bureaucratic leviathan, with all the money in the world to invest in speculative exploration and development, could hardly be more striking.Reuse content