Jeremy Warner's Outlook: The cost of public sector pensions is twice the national debt. Is that a crisis or isn't it?

Macquarie's LSE bid doesn't stack up; EMI/Time Warner; an off-key duet
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The Independent Online

Is there a pensions crisis or isn't there? Analysis published over the past two weeks by separate think-tanks appears to give conflicting answers.

According to a report by Tomorrow's Company, a business funded think-tank, there is no pensions crisis. A decent, state- funded, citizen's pension for all should be affordable, the writers argue, provided productivity and labour market participation continue to improve as they have done in the past.

Furthermore, the accumulation of housing wealth provides a perfectly acceptable alternative solution to the problem of retirement income. A decent citizen's pension in combination with value for money schemes for equity release will for most people provide adequate income in old age.

A less sanguine view of matters is taken in a report published by the Institute of Economic Affairs yesterday, though it deals with a rather different area of the pensions debate.

According to new research undertaken for the IEA by Neil Record, a former Bank of England economist and now chairman of Record Asset Management, the total size of the public sector's unfunded pensions liability is now a jaw dropping £817bn, amounting to nearly 70 per cent of GDP, or nearly twice as much as the Government's own estimate of the costs.

Just to put the number further in context, it also amounts to nearly twice the size of the national debt. Whether such a humongous sum is in any way affordable is a matter of opinion, but at about £30,000 per household, many people would think not.

Even so, the two conclusions are not necessarily incompatible. Indeed, they can be looked at as complementary. The first reasonably challenges the received wisdom that something radical has to be done to stop Britain slipping into a poverty stricken old age.

In fact nothing much has to be done at all, concludes Tomorrow's Company, other than to improve the state pension to a level compatible with basic poverty prevention and letting people, either through their savings or by working longer, do the rest. No one knows what the world will look like 40 years from now, the writers argue, so to construct public policy for an assumed outcome is likely to be flawed.

To force people to save more might even be counterproductive if it leads to lower consumption and lower rates of return. What we do know is that on present trends, productivity improvements will continue to add to wealth.

Improvements in rates of labour participation, by women and others of working age who are presently unemployed, means that the ratio of elderly dependents to those in work may not be any worse by the middle of the present century than it was in the middle of the last one. In these circumstances, higher flat rate state pensions for all should be easily affordable.

The IEA's point is a different one. What Mr Record wants to do is force the Government and the country to focus on the true costs of providing feather-bedded public sector pensions. The Government arrives at its estimate of the costs by assuming real interest rates of 3.5 per cent a year. This is far too high in Mr Record's view. Applying the 1.1 per cent implied by the Government's own, 50 year, index-linked gilt, gets you to the higher, and in Mr Record's view, fairer assessment of the real present day costs of providing these pensions.

If they were properly funded, the Government would be forced to contribute approximately 32 per cent of salary for men and 36 per cent of salary for women. Nobody in their right mind would see this as a reasonable use of taxpayers' money, nor indeed would employees be likely to regard it as a sensible use of the money either. Most would much rather enjoy at least a proportion of it now, rather than having so much deferred for uncertain life expectancy after retirement.

Pensions are a many headed monster. Cut one of them off, and others grow back in its place. Whether these latest two additions to the debate accentuate the sense of crisis or diminish it, it's going to be hard to the point of virtual impossibility for Lord Turner's Pensions Commission to establish a political consensus around whatever it has to recommend when it reports at the end of this month. Tony Blair wants to embark on radical pensions reform this Parliament as a way of helping to cement his position in history. Don't hold your breath.

Macquarie's LSE bid doesn't stack up

Goldman Sachs has become so omnipresent in financial markets that nobody should be in the least bit surprised to learn it has teamed up with the Australian bank Macquarie to bid for the London Stock Exchange (LSE).

Goldman already seems virtually to run the New York Stock Exchange, where its former chief operating officer, John Thain, is chief executive. To the astonishment of all, Goldman also managed to get away with advising both parties in the recent merger between the NYSE and Archipelago.

Should the world's most powerful investment bank be allowed to become a controlling or even substantial shareholder in the LSE too? No, no and a thousand times no.

Goldman Sachs is a bank of high integrity and professionalism, yet perceptions are all in financial markets, and to have such a big hitter in the markets also partially in control of the operating platform would be unacceptable to almost everyone else.

The integrity and independence of the exchange would be severely compromised by such involvement, even if managed at arms length through Goldman's private equity interests. Rightly or wrongly, there would be the suspicion that almost anything the exchange did, from IT to new ventures, would be first and foremost to fit in with the needs and preferences of one Goldman Sachs.

Why, it wouldn't be long before Goldman was engineering a merger between the NYSE and the LSE, rather in the manner that it disastrously attempted to do the same with the LSE and Deutsche Börse five years ago. London brokers eventually gave the whole idea a well deserved raspberry.

Goldman also advised Deutsche Börse on its more recent but again doomed bid for the LSE. What's the plan? Worldwide hegemony? It's not as far fetched as it might seem. If it were remotely possible, Goldman would do it.

That rival users of the LSE might be persuaded to accept Goldman's presence in the Macquarie bid by offering them a second tier of equity that would in some way safeguard their interests is ridiculous. Many already have a stake in the business, and if they want more they can buy it through publicly traded shares.

It's small wonder that Macquarie has found such difficulty in putting anything of substance to the LSE board. The presence of Goldman Sachs would for most users be a deal breaker. They would have to be offered something off the scale to persuade them. That in turn would mean injecting a dangerous degree of leverage into the deal. Charges would have to be raised aggressively to make it pay.

For some reason the Takeover Panel has yet to demand that Macquarie put up or shut up. No one is suggesting that this is because the panel's director-general, Richard Murley, is another former Goldman Sachs employee, but they do seem rather to get everywhere these people.

EMI/Time Warner; an off-key duet

EMI and Warner Music are said to be eagerly eying each other over the dance floor again. Yet despite the fact that digital downloads have made the music majors but pale shadows of their former selves, regulatory obstacles remain formidable and the cost cutting synergies aren't nearly as great as they used to be. They've both already cut back to the bone. Half-year figures from EMI this week are expected to confirm the company is doing just fine again all on its own.

j.warner@independent.co.uk

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