Outlook: Labour makes pension policies more complex

Smiths Group; Sir Howard's end

Labour's pension policy seems to sink further into the mire by the day, and although governments have historically regarded anything other than the basic state pensions as a problem not for them but for future generations, Britain's ageing population is making it into an immediate electoral issue.

Labour's pension policy seems to sink further into the mire by the day, and although governments have historically regarded anything other than the basic state pensions as a problem not for them but for future generations, Britain's ageing population is making it into an immediate electoral issue.

The Government's only "big idea" so far for bridging the savings gap – the stakeholder pension – has been an abject failure. Little else of value has emerged to address this vital area of public policy. Ministers trumpet the cause of long-term savings whenever the opportunity presents, but almost everything they do seems to undermine it.

The latest broadside against the private pensions industry comes in the shape of the Government Actuary's five-year review of the National Insurance rebate. Now sit up and concentrate, for even the experts find it hard to navigate their way around the byzantine complexity of the pensions maze. One way the Government tries to encourage private pension provision is by agreeing to rebate part of your National Insurance payments to your private pension plan. By agreeing the rebate, you opt out of entitlement to state earnings-related pension benefits.

In its five-year review of the size of these rebates, the Government will from next tax year overall slightly increase them, but not, as it happens, for men over the age of 54 and women over the age of 49. The Government Actuary takes the view that the amounts are still sufficient to make private pension provision more attractive than the state alternative, but most private pension consultants disagree. The Government has failed to take account of both improved mortality and lower projected investment returns, they say. The upshot is that for many people over these ages, it will be more advantageous to opt back into state pension provision than take the rebate.

According to calculations by William M Mercer, the benefits consultancy, it will require an annual rate of return of 7 per cent or more for the new contracted out rebate to deliver the same level of benefit as the second-tier state pension. The rate of return on gilts is much lower, and even on corporate bonds you would struggle to achieve more than 6 per cent. In order to get a better rate of return, you would have to take investment risks which, particularly for those on lower incomes with no other cushion of savings to fall back on, would be regarded as irresponsible.

Unfortunately, it is not quite such a simple calculation as it seems, because nobody knows what the Government is going to do to the rebate in five years time or, indeed, what it might do to the second-tier pension in the meantime. None the less, the implications are scary, both for the private pensions industry and the Government. It scarcely needs saying that the inadequate size of the rebate also deals a further blow to final salary pension schemes, since they are locked into providing an earnings-related benefit regardless. That will make employers even less keen to continue with their final salary schemes than already.

Alistair Darling, Work and Pension Secretary, was attempting to make light of the problem yesterday, as well he might, but the pensions timebomb cannot for ever be swept under the carpet.

Smiths Group

Most mergers enrich the pockets of investment bankers while destroying value for shareholders on a grand scale. One year on, the marriage of Smiths and TI shows few signs of bucking the trend. Shares in the company have gone nowhere. Moreover, the man behind the wheel at the new-look Smiths, Keith Butler-Wheelhouse, seems hellbent on getting rid of most of what he bought in the first place. TI's automotive division has already been sold and it looks like the Crane seals business and the industrial division will be next on the block. This will leave Dowty Aerospace as the only surviving TI business in a group which has miraculously grown bigger only to end up being smaller.

Although most of TI is being jettisoned, Mr Butler-Wheelhouse still reckons it was a good deal because it enabled Smiths to stay on the supplier lists of customers such as Boeing and Airbus. As an illustration, he points to the $1bn worth of refuelling business Smiths has just landed on Boeing's 767 tanker aircraft. The press release makes it plain, however, that the key to winning this order was not Smiths "tier one" supplier status but its purchase of Able, a tiny US company which makes the vital piece of kit. Smiths shareholders might wonder why it forked out £1.9bn for TI when Able has cost a more modest £12m.

As with most mergers, the main rationale for Smiths and TI getting together was the opportunity to cut costs rather than grow top-line sales. Yesterday, another 2,000 jobs were axed on top of the 2,000 which have already gone to help make the numbers stack up. The problem for Mr Butler-Wheelhouse will be what to do for an encore once the cost savings have been achieved.

He already has an answer, which is to spend another £2bn on yet more acquisitions, funded in part by the proceeds from the TI businesses being auctioned off. This will make it even harder to compare the Smiths of tomorrow with the Smiths of yesterday. At least Mr Butler-Wheelhouse will be keeping fee-hungry investment bankers happy, if not his shareholders.

Sir Howard's end

So he's not going to be the next Cabinet Secretary or the first chairman of Ofcom after all. Indeed, by agreeing to stay on as chairman of the Financial Services Authority until January 2004, Sir Howard Davies might also have ruled himself out of being the next Governor of the Bank of England, since Sir Edward George is due to retire next year.

The 18-month extension to Sir Howard's contract is based on a compromise. There's plenty of unfinished business left to sort out at the Financial Services Authority, not least because the FSA took so much longer to set up than planned. Sir Howard is also keen to hang around long enough to see the Equitable Life débâcle finally laid to rest.

But that Sir Howard has turned down the option of a full five-year extension is instructive. Rightly or wrongly, the FSA is seen by the Treasury as a triumph in public policy, and Sir Howard's determined but receptive approach to the task of City regulation is widely regarded as an integral part of the FSA's success. The Government would dearly have liked him to do another five years.

Whether Sir Howard is entirely wise to agree even to an 18 month extension is another thing. His reputation as the blue-eyed boy of Government regulators has already suffered as a result of the parallel scandals of Equitable and Independent Insurance, and the law of averages dictates that however good the FSA is at its job of City supervision, there's bound eventually to be worse to come. Sir Howard would not want to be around when there's another BCCI or Barings, still less would he want to be there if something really big goes belly up in the City.

Still, if it is true that the worst of the downturn is over, then he may yet be lucky. At the age of just 51, Sir Howard has at least one more big job left in him, and his experience and contacts would make him an obvious safe pair of hands for almost any major corporation or bank. He's unlikely to be short of offers.

j.warner@independent.co.uk