Voyage into pensions vortex

By THIS IS MONEY
Updated:

 

The great unmentionable in the political debate about pensions is the scale of the public sector black hole. So Theresa May deserves some credit for venturing into the vortex.

The Tory pensions spokesman points out that the first step in reforming public pensions will be to persuade MPs that they, like much of the workforce, need to migrate from gold standard defined benefit schemes to cheaper-to-run defined contribution plans.

At the same time the Tories will ask a newly established Office of Budget Responsibility to carry out a comprehensive review of government's off-balance- sheet obligations. At last count the unfunded public sector pensions liability was £750bn and growing exponentially.

This clearly cannot continue without leading to grievous social tensions.

May does not much like Alistair Darling's budget hit on pensions for higher rate earners either. She argues it breaks the 'basic covenant between savers and Government'.

But despite the harsh words she offers absolutely no hope it would be abolished.

She is not alone in deploring the tax hit, which looked to be based on the politics of envy rather than anything else.

An influential Lords committee noted the budget changes were inappropriate coming so soon after pensions simplification was introduced just three years ago.

The Lords make a good point. Pensions saving is a lifetime event and the dizzying changes made under Labour - from the loss of the pensions tax credit onwards - have had a dire effect on retirement.

We may not have reached the OECD's critical list which includes Ireland, the US and Australia - where defined contribution plans invested in shares dominate. But Britain has made a fairly good fist of ruining a sound system of provision.

Hester heist

Stephen Hester looks as though he will forever be known as the £10m man, following the disclosure of his pay bill from the Royal Bank of Scotland. The government and UKFI seem to have done a great job in convincing people he will be worth every penny if he delivers a £15bn return for the taxpayer, which holds 70% of RBS.

Restoring taxpayers' wealth is important at a time of fiscal stringency. Just as critical is how it is done. As we are seeing with the investment banks, the casino is back and the rewards are handsome. But it would be a tragedy if RBS took the short cut - because of an incentive plan which just targets the share price - rather than focusing on retail and corporate lending.

Bizarrely, private institutional shareholders in RBS, including some major organisations like the Association of British Insurers, looks to be more concerned about this than the government. Downing Street's agenda, at this stage in the political cycle, is to show that the taxpayer doesn't necessarily have to lose out.

As Lord (Adair) Turner, chairman of the Financial Services Authority, noted before the Commons, the City appears to be forgetting the lessons of 'biggest financial crisis in the history of capitalism'. He notes there has been aggressive hiring of traders by investment banks, which raises fears of irresponsible pay deals. Indeed, Hester may not be the only person at RBS to be well rewarded, with reports of people earning more than £1m a year.

All of this makes it ever more important that Sir David Walker's report on bank governance, due next month, is published early and unexpurgated. There is grave danger that unless the regulators act and seek to rein in excess, the horse will have bolted. What is absolutely clear from the latest British Banking Association figures is that reserves of the banking system, with £84.4bn currently held with the Bank of England, are in rude health. The problem is that the banks are not turning this into traditional lending. That is why the Hester incentive package is flawed.

Eggs for Debs

Having managed to restore the share price to a point where it could raise new cash, Debenhams can hardly count its £323m fundraising as a roaring success. Only 30.3% of the shares were taken up by existing investors and private equity backers CVC saw the offer as a chance to cut and run, reducing its stake from 9% to 2.7%. Texas Pacific Group has allowed its stake to shrink to 9%. All this is a far cry from the optimism when Merrill Lynch (of beloved memory) brought Debs back to the market at 195p in 2006. John Lovering and Rob Templeman - once regarded as retail wizards - have bought the company, if not themselves, some time. But they have egg all over their faces.

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