Outlook: Government must grasp pensions nettle before it is too late

BAE Systems; Cable & Wireless

Digby Jones, director general of the CBI, had it about right when he said yesterday that the most surprising thing about the National Association of Pension Funds survey on final salary pension schemes was not that the number closed to new members has doubled over the last year but that so many of them still exist. Even more surprising, nearly a quarter of them are still solvent enough to allow a continued contributions holiday. Those caught in the trap of an Equitable Life pension can only look on and despair.

The NAPF also exaggerates the significance of the final salary pension scheme's slow and lingering death. Defined benefit schemes, as they are sometimes referred to, always were a perk confined largely to the public sector and the middle classes. The big blue collar schemes are in the main the legacy of formerly nationalised industries. Both for employer and employee, they have long been a mixed blessing, acting as they do as a break on labour mobility and a deterrent to necessary corporate restructuring.

A recent report by the BBC, demonstrating that once final salary pension benefits are taken into account, average pay in the public sector is now higher than in the private sector, underlines the damaging economic distortions that the final salary scheme has introduced. We now seem to live in the cloud cuckoo land of a fast shrinking private sector being made to pay for gold plated public sector benefits which it can no longer afford for itself.

The NAPF is right in saying that something must be done, but keeping the final salary pension scheme on life support is perhaps not the answer. The reasons for the meltdown are well rehearsed. The bear market is a factor, as is the way new accounting standards have cruelly exposed the yawning pension fund deficits being run by many companies. The Government is culpable too, having first encouraged companies to take contributions holidays by limiting the size of the surplus that could be accumulated and then abolishing the tax credit on dividends, at a cumulative cost to the pensions industry so far of £25bn.

But the biggest fact by far is greater longevity, a phenomenon that makes final salary schemes more expensive to support by the year. Who knows how much life expectancy beyond retirement might have further improved by the time the present generation of new entrants to the workforce start to take their pension? Final salary pension schemes are meant to work on a funded basis, but it is in effect the current generation of workers who pick up the tab when assets start falling short of liabilities. This is especially the case with public sector pensions, which are nearly all paid out of taxation.

The Government has already had one stab at addressing the problem of how to save final salary pension schemes, the ill fated Alan Pickering report. His main suggestion was to get rid of the "bells and whistles", thus making final salary schemes more affordable. Ministers could barely disguise their contempt for the idea and his report has rightly been left to gather dust somewhere deep within the Department of Work and Pensions.

We already know that next week's pensions green paper will offer hardly anything by way of new suggestions for bridging the growing savings gap. The responsible minister has already admitted as much by saying existing arrangements needed time "to bed in". Without urgent action, the Government's stated aim of raising the amount of private sector provision to 60 per cent of total pensioner benefits is just fantasy. In fact the reverse is happening, with more and more pensioners having to fall back on state benefit.

The nettle needs to be grasped before it is too late. The Pensions Reform Group, chaired by the Labour MP Frank Field, has offered a solution with proposals for a "universal protected pension", a part funded, part pay as you go, publicly administered scheme that would aim to pay 25-30 per cent of average earnings to participating members. The idea needs much work, but at least it's on the right lines. The Government doesn't seem to have any ideas at all.

BAE Systems

With the prospect of war in the Middle East looming, you would expect shares in BAE Systems, Europe's biggest defence contractor, to be soaring. In fact they've fallen 66 per cent since last June alone. Only nine months into the job and Mike Turner, the chief executive, already has two profit warnings under his belt. Yesterday's bad news was a surprise only to the company's press office, which has persistently denied growing rumours of a profits warning for at least a week now.

Ever since it was privatised in the mid-1980s, it's been just one thing after another with BAE. Barely a year has passed without the need for horrendous provisions for restructuring or a contract gone wrong of some sort or other. You might have thought that the Nimrod problems had been dealt with last year, when the company provided £300m against its original folly in agreeing a fixed price contract. Not such luck, judging by last night's statement. There are still "substantial schedule and cost implications" on the order, whatever that means. The same goes for work on the Astute attack submarine contract.

Sir Dick Evans, the chairman, must be wishing he hadn't delayed his retirement afterall. He should have been up, up and away by now, but instead he chose to reassert his authority by sacking the previous incumbent as chief executive, John Weston, and "agreeing" to a further term of office. Now he stands to be held to account for what's gone wrong.

It's hard to get at the numbers, but I doubt very much whether BAE has ever adequately covered its cost of capital. That's the problem with companies run more for the benefit of HMG and the Department of Defence than shareholders.

Cable & Wireless

Another day of drift at Cable & Wireless. It cannot be that difficult to fire the chief executive, but the board seems paralysed by the thought of what happens if the company is left headless while the search for both a new chairman and chief executive continues.

So here's a thought for the City. Pick up the phone to Duncan Lewis, a former head of C & W's Mercury offshoot. He wouldn't want the chairman's slot, but he might well be interested in the chief executive's role, provided a credible chairman with whom he could work was found. He knows the industry, he knows the company, and what's more, he may even have a plausible turnaround strategy already up his sleave.

Mr Lewis works largely in private equity these days. With Apax and Carlyle, he was recently involved in a private equity bid for Energis, but eventually bankers chose to go their own route. Cable & Wireless is too big and high risk for a private equity takeover, and anyway all such bids require a degree of due diligence that most public companies would not want to lay themselves open to. But you can bet your boots Mr Lewis has examined the company in fine detail and has a fair idea of what should be done with it.

C & W is not yet another Marconi or Energis. It is still possible to salvage something from the wreckage for equity holders, but time is of the essence. The present strategy lacks all credibility and the sooner someone like Mr Lewis, with sound ideas on what to do and how to execute them, is brought in the better. The board, such as it is, seems to have lost all control of the situation. It wouldn't be the first time major shareholders were forced to man the bridge instead. Help is just a few phone calls away. If Sir Ralph Robins, the present chairman, cannot bring himself to make them, then Hermes, or some other institution with an interest in preserving what little value remains, most certainly should.

jeremy.warner@independent.co.uk