Outlook: The hidden costs of pensions mismanagement

Almost everyday brings another shocker of a revelation about the previous government's privatisation programme, it seems. Last week we learned that no proper valuation was done ahead of the sale of the rolling stock leasing companies, with the result that the public purse was seriously short changed. Today we are told that the Government's privatisation of the water authorities in the late 1980s has left the taxpayer with a hidden pounds 420m pensions liability. Whatever next?

Both these disclosures are made by the National Audit Office, the Government's financial watchdog. Its report on water privatisation makes particularly fascinating reading, if only because the NAO itself in the immediate aftermath of the water flotations said a fair price had been realised under the circumstances and everything was generally hunky dory. In the murky world of the public finances, it transpires, nothing is ever that simple; it now appears the taxpayer was ripped off after all.

The story bears some repeating. Prior to privatisation, the water industry ran a collective pension scheme which because it was largely unfunded was showing a hefty deficit. Since the water companies couldn't be privatised with unfunded pension liabilities, it was decided to break up the fund into fully funded water company schemes and a closed fund that would be left in the public sector to meet the liabilities of existing pensioners. So far, so good.

The problem arose on the division of assets. What happened was that the water companies took all the decent assets - largely equities and cash - for themselves, leaving the public sector fund with a lot of dodgy property and underperforming equities. If this had been done deliberately by the Government it might have seemed bad enough, but in fact it was done by a process of subterfuge. The company that divided up the assets, Queen Anne's Gate Asset Management, was owned by the water companies themselves.

The upshot was that a public sector liability of less than pounds 100m at the time of transfer was with dispatch turned into a much larger one when the bottom dropped out of the property market in the early 1990s. This was compounded further by very poor management of the fund. The end result is that by 2005 the public sector part of what remains of the water industry pension scheme will have run out of assets but will still have pounds 420m of liabilities to meet.

All this may seem of little more than academic interest so long after the event. We kind of already knew, or at least suspected, that the way these privatisations were accounted for in the public finances was a fiddle. But plainly there are lessons here too. The public sector has responsibility for managing pension funds with liabilities of well over pounds 100bn. If the mismanagement of water industry pension assets is anything to go by, there could be an awfully large pensions tab in the making for future generations to pick up. By mid summer, the Financial Services Authority will be largely up and running. Five of the nine organisations it will eventually encompass will have moved in together at the FSA's new London docklands headquarters in Canary Wharf, and to all intents and purposes the FSA is already operating as a single regulator for the City and financial services industry.

All of which may seem rather odd given that the legislation that brings the FSA into existence and gives it powers won't by published until the Autumn and is unlikely to receive the Royal Assent until the following summer. Is this not putting the cart just a little bit before the horse? The Commons Treasury Select Committee is beginning to think it might be and has belatedly decided it ought to be monitoring the progress of this at present almost wholly unaccountable beast.

Parliament is one thing. The advent of the FSA seems to be going largely unheeded in the City too. What with all those sackings, restructurings and mergers, not to mention having to deal with the millennium bug and preparing for the Euro, City folk may have more important matters on their hands. Howard Davies, chairman of the FSA, is meticulous about consulting on all the FSA's initiatives. But if the City doesn't bother to make its voice heard, it will only have itself to blame if Mr Davies fails to get the structure right.

When Ladbroke bought the Coral betting shop business from Bass at the start of the year, it was effectively betting that the deal would not be referred to the Monopolies and Mergers Commission. So confident was Ladbroke's chief executive Peter George that the deal would escape regulatory scrutiny that he agreed to make the purchase unconditional and duly handed over pounds 363m of the folding stuff to the vendors.

As an each way bet, however, Mr George also agreed to dispose of 133 of Coral's shops to the Tote, so that the deal conformed with the "quarter mile rule" - the requirement that no single company should own more than one betting shop within a 440 yard radius. The rule was established in 1989 when William Hill merged with Mecca to become number two in the market.

Even after the Tote deal, however, Ladbroke plus Coral still dwarfs other players in the industry with an estate of some 2,600 shops and a market share of around 35 per cent. This is the sort of figure that makes an automatic MMC referral an odds on favourite.

The Foreign Secretary Robin Cook, a keen race-goer and one-time newspaper tipster, has already intimated that the deal should be examined. With Margaret Beckett as President of the Board of Trade, he is pushing at an open door. Ladbroke could probably offload quite a few more shops to satisfy the MMC and not suffer a loss. But if the MMC orders a large- scale disposal then Ladbroke will be forced into a fire sale, made worse by the fact that William Hill, the other big player, would face much the same regulatory hurdles. When Bass was prevented from acquiring Carlsberg Tetley it at least had a fall-back position that allowed it to sell back the business to Carlsberg and Allied. Mr George has no such escape route. For a bookie, this is turning into quite a gamble.