Michael Harrison's Outlook: Pension time bomb that needs nerves of steel

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The Independent Online

Just when it looked like the pensions crisis couldn't get any worse, along comes another sickening analysis to kick you in the actuaries.

Just when it looked like the pensions crisis couldn't get any worse, along comes another sickening analysis to kick you in the actuaries. Watson Wyatt calculates that the cost of providing pensions for the country's public sector workers has risen by more than a half to nearly £600bn in the past two years. Put another way, that is like saying the output of the entire UK economy for half a year would have to be sunk into the pot to pay the pension of every civil servant.

Unlike private and occupational pensions, these public sector liabilities are entirely unfunded. Nor does Watson Wyatt's eye-watering figure take any account of the explosion in the size of the public sector workforce since the last election, which has undoubtedly made the situation worse.

The maths work something like this. Take the last published figure for unfunded liabilities of £380bn as at 31 March 2002. Apply a discount rate of 3.5 per cent for each of the past two years and the figure rises to £440bn.

Then apply the discount rate that government accountants will start to use from next year (and which is similar, incidentally, to that used by the private sector under FRS 17) and the figure goes up by a further £60bn. Apply the rate which the Government uses to calculate the present net value of Britain's nuclear decommissioning liabilities - which have a potential duration similar to that of pension liabilities - and the figure grows to £550bn. Add 5 per cent to reflect the fact that people are living longer and the figure hits £580bn. Finally, include the deficit of about £20bn in local government pension schemes and, bingo, the grand total reaches £600bn.

Unlike the money-purchase pension schemes that an increasing number of us will have to scrape along on in old age, these public sector pensions are guaranteed.

The raising of the pension age in the public sector to 65 will help stop the problem getting worse but it won't help today. Nor would an increase in employee contributions have much impact - even a doubling in the rate would raise only an extra £6bn - barely enough to scratch the surface.

In order to fund these huge liabilities, therefore, one of two things must happen. Either taxes have to rise or public spending has to fall, which implies fewer front-line services. Taking the axe to the civil service, as both Labour and the Tories promise to do, will make no difference to the liabilities which have already been run up.

There is, of course, a third way but it probably won't appeal to New Labour and that is to make pay rises in the public sector non-pensionable from here on in. As Watson Wyatt's senior consultant, Stephen Yeo, says, that would require balls of steel. But Gordon Brown is only the Iron Chancellor.

Us Rate Rise

The Fed's quarter-point rate rise yesterday was a more finely balanced decision than it should have been thanks to last Friday's shocking US employment figures. The paltry 32,000 new jobs created in the American economy compared with expectations that at least 200,000 would be added to the payroll and raised worries about the strength of the US recovery.

Given that the Fed only felt comfortable in beginning to tighten monetary policy after clear signs that the labour market had turned the corner, the latest jobs figures presented an obvious conundrum. How to justify a further increase in rates when the evidence points in the other direction?

One answer is that jobs are being created by US companies - it's just that they aren't in America. Another is that one economist's poor employment figures are another's productivity miracle. A third, and the one highlighted in the Fed's statement yesterday, is that the jobs slowdown has been a by-product of the high oil price.

Not to have raised rates again after lifting them in June and signalling that US consumers and businesses should get used to "measured increases" would have smacked of a loss of self belief and done considerable damage to the central bank's credibility.

So the measured approach to rate rises will continue against the background of an economy poised to resume a stronger pace of expansion going forward and the risks to growth and inflation in rough equilibrium.

It is worth remembering that high oil prices act both as an inflationary force by increasing the cost of goods and a deflationary one by leaving business and consumers less to spend and thereby driving down the price of non-oil goods.

It is of course possible that the jobs market will bounce back again next month, returning to the 200,000-300,000 increase which is consistent with a strengthening economy and a steady tightening of the monetary screw. Then we will all the wondering what the fuss was about.

If it does not, then it will spell bad news for President George Bush, compounding the politically damaging impression that this is a jobless recovery. On the other hand, that could make yesterday's rate rise the last one before the presidential election in November.

Myners and M&S

The board of Marks and Spencer has decided that its interim chairman Paul Myners has a longer shelf life than it first thought when he was parachuted into the job as part of the defence against Philip Green. Having begun very much as a stop-gap solution whilst a permanent successor was sought to Luc Vandevelde, we now discover that Mr Myners could stay in the post right through until the annual meeting next July.

In the meantime the search for a permanent replacement continues apace and, of course, if an outstanding candidate comes along earlier then he will step down.

What on earth could be going on behind the shutters at Baker Street? One explanation is that it is taking M&S rather longer to find a chairman than it bargained for. Another is that it has decided it can proceed at a more leisurely pace now that the boss of BhS is no longer breathing down its neck.

A third is that no one in their right minds would take on the job until there are some concrete signs that the recovery strategy announced by the new chief executive Stuart Rose begins to bear fruit.

There is probably not a lot Mr Rose and his new management team can do about trading this Christmas since the die will have been cast and the stock ordered before he arrived on the scene in May. His blueprint for M&S, laid out in July, made no mention of sales growth. For that, we will probably have to wait until next spring or perhaps later before new product appears in the stores. But the £250m of cost savings he has promised in the first year of the recovery strategy should begin to show through earlier. Investors will also have had the bone of the 100p special dividend to chew on.

Keeping Mr Myners in post for the best part of a year avoids him appearing a lame duck chairman and means M&S will not be pestered quite so much by constant speculation over the identity of his successor.

It also means that there will be a hole to fill on the board of mmO 2, which Mr Myners is stepping down from to devote sufficient time to M&S. And so the merry-go-round keeps turning.

m.harrison@independent.co.uk

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