Jeremy Warner's Outlook: Rites of passage as Standard Life is forced to come to terms with the concept of profit

A fine old mess as textile quotas bite - NI rebate is model for pension reform
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The Independent Online

The curiosity of this company from an investment standpoint is that it has yet to report a profit. Mutuals are neither set up to deliver one, nor are they required to disclose one. Instead, any notional profit made goes straight back into the life fund for the benefit of policyholders.

Yet once quoted on the stock market, Standard will be required to make a return and to pay dividends to shareholders. The adjustment is proving a painful and culturally upsetting one. In the past, the priority at Standard was the accumulation of new business, whatever the cost. Standard spent more on new business acquisition than almost anyone else, and much of it was consequently unprofitable.

The challenge for Sandy Crombie, the chief executive, has been to transform this mindset into a new one, where it is the customer relationship which is pursued for profit rather than the customer for the sake of it. At the same time, the company has had to be reconfigured, so that it either shares in the profits of the life fund, or charges a fee for managing it. Members will swap their ownership of these monies for shares and dividends in the new plc.

For Standard Life, last defender of the mutual tradition, all these changes have proved traumatic. Privately, some executives still blame the Financial Services Authority, and its harsh new solvency regime, for forcing a conversion which might otherwise have proved unnecessary.

Whoever's to blame, Standard has gritted its teeth and borne its punishment bravely. The conversion now seems to be proceeding with textbook precision. It's only a shame the nettle wasn't grasped earlier, for an awful lot of capital has been squandered fruitlessly defending a tradition which may always have belonged to bygone era. The world has changed, and Standard Life is finally catching up.

A fine old mess as textile quotas bite

Retailers are like farmers. There's always some wretched excuse. Either it's too hot, or too cold. Interest rates are either too high or inflation too low. Or perhaps it's that dastardly Ken Livingstone with his congestion charge that's keeping the shoppers away. Then there were the terrorist atrocities. Now that was a real excuse.

The same, on the other hand, cannot be said about Chinese textile quotas, which, with imports of unauthorised, cheap Chinese clothing apparently piling up on the quayside, some retailers are citing for causing a shortage of stock. Quite how it's possible to complain simultaneously both of poleaxed demand and of stock shortages is a mystery known only to the rag trade, yet there is no doubt that some retailers have been caught on the hop by the sudden imposition of the quotas.

Many have dashed to order their stock from low cost China only to find that with the imposition of textile quotas agreed between China and the European Union last June, they are no longer allowed to bring the stuff into the country. Six out of ten categories covered by the textile agreement have now exceeded their import quotas, and are piling up at customs points across Europe.

The quotas were introduced in an effort to sugar the pill for European producers, particularly those of Italy, many of whom face extinction in the face of such a determined an onslaught. Free trade, it seems, is for some not always the blessing it seems.

The immediate problem of unreleased stock could easily be addressed by allowing importers that can demonstrate their orders pre-date the quotas a moratorium. As for the quotas themselves, it's hard to see how these are going to do anything more than prolong the agony for those that have failed properly to prepare for global free trade in goods and services.

There is already evidence that manufacturers are merely switching production from China to other areas of the developing world in order to bypass the controls. This may be good for emerging economies other than China, but it hardly helps Italy's beleaguered suit makers. Peter Mandelson, the Trade Commissioner, regarded negotiation of the quotas as a triumph that would win much needed breathing space for European industry. So far they've only succeeded in creating a terrible mess.

NI rebate is model for pension reform

So now we know. According to a Financial Services Authority report published this week, you definitely would have been better off staying in second state pension arrangements (or Serps as they used to be called) than contracting out of them. The study puts the median loss for those who have been contracted out since it was first possible in the late 1980s at £3,900, equivalent to a lost pension of £3.90 a week.

The amount - not even enough for a packet of fags - is frankly so small as to be worth paying simply to insure against the risk that the Government might shift the goal posts and reduce or stop paying the second state pension. At least the national insurance rebate cannot be taken away from you once it has been given, however badly the money might have performed in the meantime.

Financial advisers have long urged clients, particularly their older ones, to contract back in, so there is nothing particularly new in these findings. Even so it's a bit of a revelation to have final confirmation that you are likely to be better off if you had never contracted out in the first place and quite contrary to the way this option was marketed in the late 1980s. Back then we were told that the accumulator effect of investing the national insurance rebate was almost bound to yield a better result than Serps.

So what's gone wrong? Only some of it can be blamed on low interest rates and poor stock market returns. The main mischief is that having rid itself of second state pension liabilities with the lure of relatively generous national insurance rebates, the Government then cut the size of the rebates, undermining the relative attractions of being contracted out.

Another case of mis-selling? Almost certainly, but since it is the Government which is largely to blame you won't find anyone at the Treasury or the FSA admitting it. What are the lessons as ministers contemplate which route to take on pensions reform?

The Government has two priorities. One is to keep state pension provision affordable, which as things stand it probably is. The drawback is that the system is also insufficient even for the purpose of straight poverty prevention, let alone that of providing a decent standard of living in old age. So the other priority is to find a way of persuading people to save more of their incomes.

The model for this is the national insurance rebate, which in essence is an existing form of compulsory saving. One of the main options being studied by the Pensions Commission is beefing up this element of the tax system, so that the amounts saved into a pension could be made correspondingly larger. Employees and employers would automatically have contributions deducted and paid into a state sponsored but privately managed pension pot.

The FSA report is hardly helpful to this approach. Rebates privately invested have failed to keep pace with even the pathetically small benefits offered by Serps. In investment, there can be no guarantees, yet personally I'm convinced that some form of auto-enrolled, state sponsored saving arrangement is still the right way to go. After all, what are the alternatives? Well, the Government could provide better state pensions. If on the other hand nothing is done, millions are likely to end up relying on benefits in their old age, which in monetary terms adds up to much the same thing. Either way the tax implications are grotesque.