Outlook: Pickering is too little too late to save final salary pensions

JJB Sports warning; Fiddling the numbers Ê
Click to follow

"The Pickering Report, A Simpler Way to Better Pensions", is to be commended in its general, deregulatory approach to the basic problem of how to save the final salary pension scheme. Companies should in most cases be allowed to decide what pension arrangements best suit them and, more particularly, what they can most afford. Employees would then be free to consider those arrangements as part of the overall remuneration package in deciding where they work. If the report helps reverse the tide of regulation and red tape that seems to be drowning all private pensions provision, then it will have achieved at least some of its purpose.

So far, so good, but there are big problems with some of the central proposals. They also seem a case of too little, too late. The final salary pension scheme is a dying and fast disappearing perk. Alan Pickering's proposals don't even fall into the category of Green Paper, and the Government was noticeably cool in its response to them yesterday. By the time any of them reach the statute book, if any of them do at all, the final salary scheme will be as dead as a dodo.

There's very little ministers can do to stop the slaughter. Indeed, the Government was one of the major causes of it, by abolishing the tax credit on dividends. At the time, with stock markets rising strongly, it seemed a painless enough revenue raising devise, but with markets now close to free fall, it looks to have been grossly irresponsible. The main reason so many companies find they can no longer afford final salary pension schemes is not that people are living longer, but that investment returns are so poor, making companies liable to ever larger funding shortfalls. Removal of the tax break on dividends is a major contributory cause, costing the pensions industry an accumulated £20bn over the past five years.

In such circumstances, companies are bound to take steps first to cap and then reduce their unfunded pensions liability. The Pickering Report suggests the problem might be dealt with by reducing the obligation to provide benefit. Index linking of benefit and "survivor benefits", which is the obligation to pay a pension a surviving spouse, would both go. This might substantially reduce schemes' funding requirements, but it doesn't offer much comfort to the employee, who would be forced to make alternative provision elsewhere to pay for the spouse and provide protection against a return of inflation. As such, it wouldn't help reduce the savings gap at all.

People already know that you cannot rely on the state to provide a decent pension in retirement. They are beginning to learn that they cannot rely on their companies or personal pensions to do so either. As a piece of sticking plaster, the Pickering Report is about five years too late.

JJB Sports warning

As a former professional footballer, Dave Whelan knows he scored a spectacular own goal yesterday. The market has been looking to give the JJB Sports chairman a kicking ever since he wrong footed everyone with the surprise £42m acquisition of the discount retailer TJ Hughes earlier this year. Yesterday's grim profits was the chance it has been asking for, and boy, did it seize on the opportunity. JJB shares sank nearly 40 per cent even though profit downgrades were only 10-15 per cent. The City is not sure it understands the strategy any more. And it is starting to question the management too.

There is no doubt that Mr Whelan has built a fine company up there in Wigan. From a single shop opened in 1978 he has developed JJB into a 400-store monster which is the market leader by a country mile. But he is 65 now and spreads himself thinly. Besides his executive chairmanship of JJB, he also owns the local football club, the local rugby league club and a local rugby union club too. He even owns the local pie maker, partial as he is to a "Wigan chunky", whatever that may be.

His chief executive is his son-in-law and a four handicap golfer besides, who must play a bit to keep that figure so low. The City is never happy with incestuous management. As for the strategy, it looks more and more like the TJ Hughes deal was either a management whim (Mr Whelan liked the business when he was a lad). Alternatively, it may have been an admission that the main sports business was going ex-growth.

With such a huge market share in UK sports retailing, JJB was going to have to look for other avenues of growth eventually, but was TJ Hughes the right approach? The City always imagined related areas such as health clubs, Soccerdomes and overseas expansion in markets such as Holland to be the more appropriate course. What it gets with TJ Hughes is diversification into discount department stores. That's not what most investors bought the shares for.

JJB Sports bounced back from the profits warning it issued after acquiring Sports Division a few years ago, but that acquisition was always bound to work in the long term. The road ahead looks bumpier now. The JJB team may need some new faces to get the company back on track, and the City back on side.

Fiddling the numbers

There are lies, damn lies and the Office for National Statistics. Yesterday its chief beancounter, Robin Lynch, produced a mind-numbing explanation of why the ONS has decided to allow Gordon Brown to keep Network Rail's £21bn in debt off the Government's books.

The answer favoured by most people outside the Treasury and the ONS is that to have done otherwise would have blown a large and very nasty hole in the Chancellor's public finances. Think of all the doctors, nurses, teachers and policeman that Mr Brown would not be allowed to recruit if the money underpinning the rail network scored as debt in the national accounts.

Luckily for the Chancellor it doesn't because the ONS has decided in its wisdom that the £21bn is a contingent liability and is therefore unlikely to be called on. A similar ruse was used to exempt the government-guaranteed bonds which are financing the Channel Tunnel Rail Link from the public finances. What's more, says Mr Lynch, it doesn't matter that Network Rail looks, smells and feels to the outside world like an arm of government, it will be classed as a private sector company for the purposes of the national accounts even so.

But hold on a minute. Don't private companies have to apply commercial accounting standards and doesn't this mean that Network Rail along with all of its liabilities really ought to show up on the books of the Strategic Rail Authority? Oh dear, you really must learn the difference between commercial and national accounting. See the answer above.

Mr Lynch says the ONS will stand by its decision until the day that Network Rail begins to fail and the Government has to step in and bail it out. At that point the company will immediately be reclassified as part of the public sector and its debt placed back on the public finances. But isn't that the whole point? If the debt is guaranteed and Mr Brown can replace one lot of management with another, isn't it what most people would regard as a public sector body. Not to the ONS, evidently.