The real problem with pensions

By ANTHONY HILTON FOR MAILONLINE
Updated:

 

POSSIBLY the best news this week, though it remains unconfirmed, is a report that the Treasury and Inland Revenue are rethinking their plan to put a £1.4m cap on the size of individual pension pots.

When this idea was first mooted, the Government said it would affect only 50,000 people and was being done in the interests of fairness. It is now more or less forced to admit it could catch nearer 500,000 and cause a collapse in morale and saving across the entire upper swathe of British management. Typically, however, rather than scrap this dreadful idea altogether, the whisper from Whitehall is that the ceiling might be raised to £1.8m or possibly £2m so it will catch only the original smaller number.

It is such a bad idea because it will achieve next to nothing in tax revenue terms and cause huge collateral damage. Any cap of this nature makes a nonsense of sensible pension planning. Its most likely effects will be to drive people to work overseas or make them lose interest in planning for retirement at home for themselves and, by extension, for anyone else whose pensions they have responsibility for. They will feel there is no point in setting money aside when Government, on a whim, will move the goal posts.

If well-paid executives are discriminated against in final-salary pension schemes, many will be less inclined to sacrifice profits to shore up the funds for employees in their charge. So the cap could finish what Chancellor Gordon Brown's £5m-a-year tax levy on dividend income started - it will kill off the occupational final-salary pension scheme.

That will be a huge indictment of the Government. In barely seven years it has turned an occupational pensions market that was the envy of Europe into a basket case. It has undone all the hard work and diligence of two generations of planning.

Its obsession with tinkering is the more misplaced because the real injustice and incompetence in pensions is almost entirely in the State sector, not the private sector. This is not simply the old beef about guaranteed inflation-proof pensions enjoyed by senior civil servants which have never been properly costed and accounted for. It is the more widespread and casual indifference to the real costs of State sector pension mismanagement across the board.

One minute where they have funded pensions they are selecting cosy discount rates so that schemes appear better funded than they really are to ensure that quangos and local authorities will not be exposed to the embarrassments companies face under accounting rule FRS17. The next they are allowing people - particularly police and teachers - to retire early on ill health grounds at an age and on terms that would bankrupt a private company.

We live every day with the hidden consequences. A huge slice of police and education budgets are spent not on putting police on the beat or teachers in the classroom but on paying lifetime pensions to those granted retirement at 45 because of stress and who are under no pressure to work - at anything - again.

Turn your attention to those problems if you dare, Mr Brown.

Lunch light

THE lengthy interviews that appeared this week with new Stock Exchange chairman Chris Gibson Smith failed to reveal what is surely the big story. The tower is abuzz with the rumour that he has agreed to reinstate the Exchange's annual Christmas lunch, which was for generationsone of the key traditions of the City, but discontinued by Gibson Smith's predecessor, Don Cruickshank. If true, it is a shrewd move.

It is an important one too, because not only were the Christmas lunches a brilliant opportunity to get at the Exchange's legendary wine cellar, they were also one of the few events when the great and the good of the City, Government and Treasury gathered informally.

The Governor of the Bank of England would be there, the Stock Exchange board, the Chancellor of the Exchequer, key Treasury mandarins and movers and shakers from the big firms, trade associations, clearers and settlors. It gave them a chance to meet and remind themselves they were more or less human and could talk rather than shout slogans at each other.

One does wonder if the weird initiatives of the Treasury that seemed designed to demolish half the City's business would have gained so much ground and done so much damage if the people on both sides knew and liked each other a bit more.

A Christmas lunch will not fill the communications gap - but it is a move in the right direction.

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