Outlook: Interest finally returns to MPC's rates decision

Enron/pensions; Discounting BMI  
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The Independent Online

Perhaps unfortunately, the published minutes to meetings of the Monetary Policy Committee are not a verbatim account of who said what to whom, but a sanitised summary of the debate. If they were the former, then the minutes to yesterday's meeting might read something like this. Sir Edward George, Governor of the Bank of England, opens the proceedings by saying that the interest rate decision had once again become a difficult one, after three months when it was a complete no brainer.

Turning to Sushil Wadhwani, the most dovish of the MPC's nine members, he asks whether it can be taken as read that Sushil would once more be urging a cut in rates. Mr Wadhwani mutters something about the Bank's inflation forecasting model needing an overhaul, and by the way, yes, it can be taken as read. The global economy continued to look exceptionally weak, the consumer boom would soon run of steam, and manufacturing was meanwhile going down the pan.

"What about you, Mervyn", says Sir Edward, turning to one of his two deputies, Mervyn King. "You surely haven't come over all dovish as well? In that interview you gave to the Financial Times the other day you too seemed to be concerned that everyone would suddenly stop spending, and then where would we all be?"

Mr King smiles condescendingly. "As you know Eddie, I am neither a dove or a hawk. I merely do what is right and, yes, I do worry that the only prop to the economy, consumer spending, might break. But as things stand, the balance of risk has again moved sharply to that of inflation. Just look at those bolshy train drivers. Anyone would think we were living in the 1970s again. Anyway, I thought it was you who was saying interest rates would have to go up to dampen down the consumer boom."

Sir Edward: "Yes, crafty that, wasn't it? I managed to achieve a monetary tightening without actually doing anything, since all the market rates went up after my radio interview." Subdued round of applause. Sir Edward: "So that's agreed then. No change."

Enron/pensions

The US President, George W Bush, has ordered a review of US pension regulations following the collapse of Enron. One of the most disturbing aspects of the insolvency was that employees had more than half their pension fund assets invested in Enron shares, which are now worthless.

Worse, due to an administrative change in the scheme, employees were prevented from divesting their Enron holdings during a crucial 10-day period of bad news in late October and early November when the stock lost nearly a third of its value. Forget the now active criminal investigation into false accounting at Enron. The real scandal is that as directors piled out of the stock they had been so active in promoting, their downtrodden staff were locked in to face the music.

Many employees have thus suffered the double blow of both losing their jobs and the great bulk of their retirement nest egg. In Britain's last big corporate scandal, Robert Maxwell stole from the pension fund in order to prop up his ailing business empire, but in the end no one suffered as badly as Enron employees seem likely to. Nearly all the stolen Maxwell millions were eventually recovered, and job losses were minimal.

The lax audit, banking and management practices that allowed the Maxwell scandal to happen were much mocked on the other side of the Atlantic at the time, in apparent disregard of the mote in America's own eye. Indeed, in recent years it has become fashionable to praise the 401k pension plans that sanction such reckless investment in the employer's own stock. Many respectable British voices have been heard to lobby for the same thing here.

Not much danger of that now. As it happens, Enron is by no means the worst case pension fund incest. Coca-Cola, General Electric and McDonald's all have more than 75 per cent of their 401k pension plans invested in their own stock, and jolly proud of it they were too until the Enron collapse so painfully demonstrated the downside of having all your eggs in one basket. On this side of the Atlantic, where on the whole we are much more cautious about the way our pension money is invested, it's hard to understand how such a high-risk strategy could ever have been allowed.

In part it's cultural. US companies actively encourage employees to buy into every aspect of the sales pitch. And although the 401k plans are meant to empower employees to make their own decisions on where their pensions are invested, in practice they tend to offer only a very limited range of options, prominent among which is naturally the company's own stock. In Enron's case, the employers' pension contribution was made not in cash, as it is in Britain, but stock. For every dollar invested, there would be 50 cents of Enron stock. Again this is pretty much standard practice across a large number of big US corporations.

A painful period of adjustment is now in prospect as new laws are introduced limiting exposure to any one asset to, say, 10 per cent of the total. The excesses of the last bull market are not so easily buried, it would seem.

Discounting BMI

Is that the sound of the free drinks trolley being wheeled away and the curtain at the front end of the cabin being pulled back? After years of being in denial or just plain dismissive of low-cost air travel, BMI British Midland has taken a reality check and announced plans for its very own budget airline.

With no-frills carriers storming across Europe and taking huge bites out of the well-upholstered rears of the full-service airlines, BMI had little choice. The question is whether the strategy will work. The as-yet-unnamed airline looks a bit of a half-hearted effort. It will only operate from East Midlands airport, which is not exactly the holiday airport of choice for most people, and its fleet will consist of just two ageing Boeing 737s operating daily round trips to six tourist destinations in the Mediterranean.

To launch anything more ambitious would risk cannibalising BMI's own full-service airline, which is already feeling the pinch from the assault of other budget carriers. BMI insists it has been planning its answer to Go, easyJet and Ryanair for the best part of a year. But it is hard to escape the suspicion that the announcement of BMI-lite, or whatever name is dreamt up, has more to do with spiking Barbara Cassani's guns after the chief executive of Go announced her own plans to launch operations from East Midlands.

The truth, as the wily Sir Michael Bishop, chairman of BMI, knows only too well, is that full-service airlines cannot co-exist under the same roof as budget carriers. British Airways proved as much during its short and uneasy cohabitation with Go. Sir Michael would be much better employed getting on with the more pressing plan of introducing low-cost principles into the operation of his full-service airline, starting with more productivity from his pilots and aircraft.

j.warner@independent.co.uk

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