Jeremy Warner's Outlook: Untold damage to our pensions system as a grave injustice is finally righted

Rate rise won't put paid to yen carry trade; Lack of imagination in A&L's buy-back

The Government has acted in a mean-spirited and heartless way in denying compensation to 125,000 who lost their pension benefits when the companies they were working for became insolvent. Even after the Parliamentary Ombudsman found the Government guilty of maladministration in the matter, ministers continued to deny responsibility.

With yesterday's High Court ruling, that position now looks unsustainable, and we must assume that, faced with a growing parliamentary rebellion, the Government will be forced to cave in and compensate on at least the same terms as those offered by the newly created Pensions Protection Fund - 90 per cent of benefit up to a cap of £26,000 a year.

This would be a good outcome, and a tribute to all those who have campaigned to ensure that a clear injustice, affecting some of the most disadvantaged of society, is righted. Of course, governments should not pay compensation lightly, but to deny recompense to those who have obeyed the Government's strictures on the need for thrift - this on the understanding that solvency regulation would underwrite their savings - was always going to be a difficult corner to argue. Labour has done itself much harm with its own core supporters by doing so.

Yet it is not just the Labour Government which has paid a heavy price for this debacle. The realisation that government may ultimately be held liable for private-sector pension liabilities is one of the factors which has driven a plethora of new pensions regulation. This in turn is quickly killing off what remains of Britain's final-salary pensions system.

Much of this legislation is in itself perfectly sensible, but the end result has been little short of disastrous: there are few better examples of the law of unintended consequences. By trying to convert what was once the expectation of a pension offered as a perk to employees of long service into a guarantee, the Government has heaped massive liabilities on to company balance sheets which corporate Britain has scrambled to address by closing down their defined benefit schemes.

The irony is that by trying to buttress the relatively small number of cases where pension promises get broken, the Government has succeeded in undermining on a much wider front what was once one of the best private-sector pension systems in the world. All in all, an outstanding result.

Rate rise won't put paid to yen carry trade

If the intention of the quarter-point rise in Japanese interest rates was to address the weakness in the yen, it failed. After a brief surge, the Japanese currency again fell back yesterday, closing lower overall. Reversing the slide in the yen, and the related "yen carry trade", is going to require much tougher action than this.

The problem that Japanese policymakers have got is that the Japanese economy still doesn't warrant such action. To the contrary, it needs a sustained credit squeeze like a hole in the head, as a number of government ministers have repeatedly pointed out. True enough, the Japanese economy grew by a remarkable 4.8 per cent in the final quarter of last year. A bit like Britain, the benign, headline inflation rate masks some quite fierce inflationary pressures in the housing and service sectors.

Even so, Japan's economic recovery remains extraordinarily fragile and is in any case still largely export-driven. Overall pricing pressures also remain depressed, with the targeted rate still at close to zero. Premature action by the Bank of Japan over the past 17 years has repeatedly killed off nascent economic recovery. The Government is right to warn of the dangers of repeating these policy mistakes.

A mere quarter point was never very likely to put a rocket under the yen, and it is still miles short of the action necessary to deter "carry trade" activity - borrowing cheaply in yen to lend more expensively in America and Europe. The failure of the yen to respond to yesterday's medicine will only further encourage hedge funds in the belief that the carry trade is a one-way bet.

This it is certainly not, but, as regular readers of this column will know, I've long held the view that the threat posed to financial stability by these trades is much exaggerated, and that, to the contrary, they tend only to reflect the economic fundamentals.

Japan runs a massive trade surplus with the rest of the world, testament to its still world-beating manufacturing sector. The effect is to produce an equally massive surplus of savings. Since these savings cannot profitably be invested in the domestic economy, both because interest rates are too low and because of still high levels of excess capacity in the business sector, they must flow somewhere else. The carry trade only services this need.

Japan is not the only country with the "problem" of excess liquidity, nor even the one with the biggest surpluses in this regard. There is a similar need to export capital in China and in the energy-rich countries of the Middle East and Russia. Thanks to the high oil price, the capital flows coming out of the Middle East eclipse those of Japan.

The flip side of this particular story is the relatively strong currencies and high interest rates of the Anglo-Saxon world. The trade deficits of Britain and the US are supported by big inflows of foreign capital. Foreign investors choose to stick their money in these places because they have deep and liquid markets, are governed by the rule of law, and have plenty of low-risk assets that savers want to buy.

The symbiosis that currently exists between these trade and capital imbalances plainly cannot last for ever, but for the time being they look reasonably justified and therefore sustainable. Certainly, yesterday's action by the Bank of Japan isn't about to bring them to an end.

Lack of imagination in A&L's buy-back

A veteran City analyst I once knew, now sadly deceased, used routinely to divide companies into BBCs (big boring companies) and LBCs (little boring companies). He didn't really have a name for the exciting ones, and I'm not entirely sure how he would have categorised Alliance & Leicester, which is certainly dull but is neither truly a BBC nor an LBC.

As a mid-sized bank, it lies somewhere in between. Its results probably wouldn't have merited a headline in this morning's newspapers but for the surprise news that the company's 58-year-old chief executive, Richard Pym, has decided to step down. As far as we know, there is nothing sinister about this announcement; he seems to have done a pretty good job in settling the ship and putting it on a sustainable course for the future since the departure under a bit of a cloud of Peter White five years ago.

But the lack of imagination manifest in yesterday's announcement that A&L is using the capital freed up by Basel II capital adequacy regulations to double the size of its share buyback is indicative of all that is wrong with British retail banking today. To be fair, it is not just A&L. Companies across the board are under pressure from investors to return capital, rather than do something more high risk, with the bumper returns they are currently generating.

Again, to be fair, A&L has done quite a lot to improve the competitive landscape of retail banking with some keenly priced products. But no bank seems prepared to go the whole hog by using surplus capital to give customers a genuinely better deal in the hope that this would drive a virtuous circle of growth. For the time being, customers must rely more on regulators than markets to do the job of improving their lot.

Maybe one day one of the banks will have the courage to break free from the cosy little club of clones they operate in. Until they do, they will for ever remain BBCs and LBCs or, in A&L's case, an MBC (middle-sized boring company).

j.warner@independent.co.uk

PROMOTED VIDEO
Sport
Getty
News
Women have been desperate to possess dimples like Cheryl Cole's
people Cole has secretly married French boyfriend Jean-Bernard Fernandez-Versini after just three months.
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
Extras
indybestThe tastiest creations for children’s parties this summer
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Paolo Nutini performs at T in the Park
music
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

HR Advisor - 6 months FTC Wimbledon, SW London

£35000 - £40000 per annum + Benefits: Ashdown Group: HR Advisor - 6 Months Fix...

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
In pictures: Breathtaking results of this weekend's 'supermoon'

Weekend's 'supermoon' in pictures

The moon appeared bigger and brighter at the weekend
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor