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
Thursday 22 February 2007
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).
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