Smoke and mirrors in Chancellor's climbdown

Myners reform; British Energy

As climbdowns go, the one executed yesterday by Gordon Brown, the Chancellor, was, on his own figures at least, not as expensive as might be thought. Indeed the stated cost is so limited as to be scarcely believable. According to the Pre-Budget Report, the measures will cost the Treasury £3.9bn, of which the bulk is accounted for by the increase in the state pension. The "transport and environmental measures" are budgeted at just £1bn. If that indeed is all they cost, it would not be much of a concession.

As climbdowns go, the one executed yesterday by Gordon Brown, the Chancellor, was, on his own figures at least, not as expensive as might be thought. Indeed the stated cost is so limited as to be scarcely believable. According to the Pre-Budget Report, the measures will cost the Treasury £3.9bn, of which the bulk is accounted for by the increase in the state pension. The "transport and environmental measures" are budgeted at just £1bn. If that indeed is all they cost, it would not be much of a concession.

But as ever, smoke and mirrors are much in evidence. Not factored into the headline figures is the cost of measures on which the Government has promised to "consult". You may not have noticed it, but the 3p a litre cut in duty on ultra low sulphur fuels is at this stage not a commitment but a consultation. If implemented, everyone would switch to these fuels and the cost to the Treasury in lost revenue would be very considerable indeed. The true cost of the Autumn Budget measures is thus not £3.9bn, but much more like £5bn to £6bn. Don't say it in Mr Brown's presence, but it looks suspiciously like a pre-election bribe. Altogether, the measures are the equivalent of 2p off the basic rate of income tax.

The iron Chancellor has proved himself much more pliable than he would like to pretend. Fortunately, the state of the public finances is so good that he can probably afford to do this without risking a hike in interest rates or unduly damaging his reputation for prudence.

Looking into the future, the forecasts for public sector borrowing are even better than they were at the time of the March Budget. Lower fuel duties will damage these predictions a bit but not by enough to risk breaching the Chancellor's golden rule of achieving a current surplus over the lifetime of the cycle. The Chancellor likes to think of this happy state of affairs as down to his good management. Opponents say it is more to do with luck and the preparatory work of his predecessors.

Whatever the answer, the Chancellor does at least seem to be listening. There was plenty in the package of consultation documents yesterday to please business, notably the proposed reforms in withholding tax and double taxation relief. As ever, the proposals are steeped in unnecessary complexity, but business does seem genuinely to be making some headway.

Myners reform

The Minimum Funding Requirement, imposed after the Maxwell scandal in an attempt to ensure that pension fund assets would at all time match their liabilities, always was a bit of a sledge hammer to crack a nut. In point of fact, very few defined-benefit pension funds comprehensively go under, while the buoyant stock market has made funding shortfalls relatively uncommon as well. In practice, the adverse effects of the MFR seem far to outweigh its benefits, and Paul Myners, the fund manager who is advising the government on pension fund investment, is right to want to consign it to history.

To the regret of many company employees, defined-benefit schemes are seriously on the wane. Very few of them are started these days and even companies that have existing schemes are in many cases attempting to wind them down. Mr Myners believes the MFR has played an important part in this trend, since it has increased the cost of providing defined-benefit pensions by preventing investment being allocated in an optimal way. It has also distorted investment patterns, driving pension funds into low risk gilts. If the MFR has any upside at all, Mr Myners is unable to identify it.

The bigger question is what should replace it. As far as protection against fraud is concerned, Mr Myners is probably right in thinking a beefed-up version of the existing Pension Compensation Scheme adequate for the task. Where underfunding occurs as a result of high risk or reckless investment, the employer is obliged to pick up the tab, so in most cases it shouldn't be an issue. However, where the employer becomes insolvent, or simply disappears (a growing problem in the rapid shift from Old to New Economy) it plainly is. How then is the liability met? What too is the mechanism for obliging an employer to make up likely shortfalls on a timely basis without the MFR benchmark?

Mr Myners seems to have withdrawn from an early flirtation with the idea of mutual insurance or a central discontinuation fund, of the type that exists in the US. There would be no public money for such insurance, and in any case it would only seem to encourage reckless investment at the expense of more conservatively run funds.

Instead, Mr Myners suggests that greater transparency, disclosure and professionalism are the answers. Again he is probably right. The MFR have already demonstrated that rigid and prescriptive investment rules are often damaging in their effect, and in any case they are wrong in principle. The world of investment is a fluid and fast changing. It cannot be right to restrict unduly a pension fund's freedom of movement within it.

There are obvious dangers in what Mr Myners proposes, but the risk is worth taking if it helps prevent the demise of the defined-benefit pension scheme. More dynamic investment of the pension fund billions would be an added bonus.

British Energy

Living room under three feet of water? Family heirlooms floating off down the high street? Something unpleasant backing up through the plumbing system? Don't worry, it's great news, according to British Energy at least. To the nuclear industry, all this freak weather is seen as a positive boon, demonstrating once and for all that if you don't want a hole in your ozone layer, then atomic power is the only answer.

The renaissance of nuclear electricity has been predicted many times before, of course, only to melt down before our eyes. One obstacle is the economics. Until consumers are forced to pay for the environmental costs every time they switch on their gas-fired central heating, then nuclear power will never be competitive with other energy forms.

The other problem is the nuclear industry's inability to agree on what should be done with the spent fuel it leaves behind. Reprocess the stuff and ship it back to the Japanese? Store it in dry cells? Dig a hole half way to the Earth's core and bury it? Hell could easily freeze over before British Energy and BNFL reach agreement on what to do about back-end fuel costs. Meanwhile the plutonium mountain at Sellafield continues to grow.

Ah, says BE's chief executive, Peter Hollins, but the world is slowly realising that nuclear power really means green and sustainable energy. He has looked out of his nuclear bunker and detected a change in the climate, at least in public opinion. Not enough to warrant building a new generation of reactors yet, perhaps, but sufficient to believe that the nuclear industry is winning the argument. Just one problem. Before any investor would go anywhere near a new British Energy reactor, the company will have to make a much better fist of running the ones it already has. Safety considerations limit the scope for cost-cutting and it will take a sharp recovery in prices to put the company back in the black. Meanwhile, British Energy's brave talk about a new nuclear dawn remains so much greenhouse gas.

* outlook@independent.co.uk