Bridgeman's pension plan has its own problems

Shock, horror, hold the front page and all that - most pension schemes are a rip-off. This was the not altogether surprising conclusion of the Office of Fair Trading's inquiry into the pensions industry, which is found to be riddled with consumer problems of one sort or another. Rather more contentious is John Bridgeman's 10-point plan for reform. Among some perfectly reasonable and sensible suggestions for improving the lot of those trying to save through pension products, the director general of fair trading makes some highly debatable assertions.

The most inflammatory of these is that "tracker funds deliver better and cheaper financial performance than actively managed funds, as fund managers cannot consistently beat the market with active fund management". Well now, Mr Bridgeman. Have you ever met the formidable Carol Galley, vice chairman of Mercury Asset Management? She'd be prepared to give you a lecture or two on that one.

Certainly it is true that the average actively managed fund does tend to underperform the index. However, the best substantially outperform, even over the long haul. An outperformance of only 1 per cent per annum over 40 years would yield an extra 25 per cent pension in payment.

Furthermore, the observation that passively managed funds do just as well if not better than actively managed ones is really only applicable in rising markets. Since this is what equity markets have been doing for the past 10 years, the observation seems to have been supported by the evidence. But in fact, actively managed funds nearly all do better in falling markets.

The other obvious point to be made here is that the cost of fund management is not in any case the chief villain of the piece. Asset management, whether active or passive, only accounts for a small proportion of costs. It is in the marketing and selling of pension products that the big costs are run up and the true damage to savings is done. Plainly this is a much more difficult area of vested interest to attack. When everyone in the insurance and pensions industry is doing so well out of the present set- up, there is no market incentive to change it. Why would the industry want to give up highly profitable personal pension and money-purchase schemes in favour of the much less profitable "designated personal pension" suggested by Mr Bridgeman?

In these circumstances, the OFT suggests, the Government should step in and force the industry into change by banning certain obvious abuses and seeking to standardise fees at a fixed proportion of the capital sum accumulated. Rather more contentious are the suggested changes to the tax system to penalise employers that contribute little or nothing to defined contribution schemes. That looks too much like imposing Continental style social obligations on companies.

All the same, on balance Mr Bridgeman proposes some reasonable and long overdue reforms which the Government should undoubtedly build into its review of pensions, expected to be announced later this week. This is an industry that has lamentably failed to provide value to a very significant proportion of its customers. If the market is too entrenched to provide customers with a solution, then the Government must step in and shake things up.

Ignore this moaning about the strong pound

Not a day goes by without an industry lobby group or a troop of City economists moaning that the strong pound will cost jobs and plunge the economy into recession - and this as new official figures show that the profitability of UK companies has returned to its 1985 and 1988 peaks.

This is one of those times when British industry seems far more efficient at lobbying than it is at manufacturing. Without downplaying the fact that an exchange rate so high makes life difficult for exporters, it is worth remembering with each complaint about unbalanced economic growth that the economy is fundamentally unbalanced already. Manufacturing accounts for only a fifth of output and jobs in the UK. No amount of fiddling about with the exchange rate is going to halt its long-term decline.

The other point to be kept in mind here is that the pound's surge in the currency markets is not caused by rising UK interest rates alone. It is typically insular to think that the dignitaries on the Bank of England's Monetary Policy Committee and the Chancellor alone bear the blame for the strong pound. In fact, sterling's appreciation is only the flip side of the weak German mark.

There could be nothing more symbolic of this than the fact that the Bank of Italy has had to intervene to prop up the mark and prevent the Italian lira from climbing any further. This apparently ludicrous state of affairs stems in large part from the fact that we are in the middle of one of those periodic episodes of turbulence in currency markets which is washing the globe.

In setting policy, the authorities would therefore be wise to ignore those who say something must be done about the strength of the pound. Even assuming they could do something, it is by no means certain what purpose would be served by doing so.

Water troubles ahead for Prescott

Politics is about the art of the possible and, when it comes to improving the lot of water customers, the Deputy Prime Minister John Prescott is fast discovering that it is easier to deliver rhetoric than results.

Two months ago Mr Prescott convened his grand Water Summit - an opportunity simultaneously to humiliate the privatised water companies in public and demonstrate that New Labour was serious about doing something to improve the situation. Yesterday we had the results of the Water Summit Challenge - the water industry's response to the Deputy PM's 10-point action plan.

The good news is that they have all fallen into line under Mr Prescott's mixture of exhortation and admonition. "Government unites water companies in providing better service," trills the press release.

The reality is a bit less exciting. Many companies were already offering free leakage and repair services on domestic premises. Now it is universal. The compensation schemes for drought-related interruptions that all companies will now sign up to are academic since they have all agreed that droughts are a thing of the past. As for saving on toilet flushing, Mr Prescott would not have been able to brandish a hippo at his water summit had they not already been widely available.

Where Mr Prescott is less forthcoming is in the tougher areas such as mandatory leak targets. Despite the Ofwat National Customer Council's call for "an immediate and substantial cut" in water bills, there is no firm indication of how this will be achieved when new environmental directives are piling up in Brussels. The bathing water directive alone could cost pounds 5bn to implement.

Implausible as it may seem, Mr Prescott has made friends with the water industry. But delivering cleaner drinking and bathing water at the same time as lower bills will prove a much biggest test of his ability.