This week’s message from the Confederation of British Industry: we’ll just die and then you’ll be sorry. I take this as more of a threat than a promise, but since it is all about pensions, anything is possible. Many (perhaps most) of the CBI’s member companies must now be stuck with underfunded pension schemes, the regulators want to set them a timetable for topping up their funds, and the CBI says that if this is taken literally, one company in every five will be put out of business. A perverse logic would work itself out: overstretched companies and underfunded schemes are always likely to go together. Companies like these would be required to find more cash in more of a hurry. They would also have to contribute loaded payments to the Pension Protection Fund. Some of them would run out of cash and go bust. Their pension promises would then become a charge on the protection fund, whose managers would have to call for more money. Other companies would, of course, have to provide it. For those nearest the edge, this call would be enough to tip them over. The process would then repeat itself, and only the actuaries would be happy. They now keep themselves busy by putting the pension funds into long-dated government stock for a minuscule yield, which can be set against long-dated promises. If this stock justifies its entry in my Bad Investment Guide, the funds can always buy some more. At this point, their sponsoring companies ask themselves whether they want to be in the pension business at all, and then join the rush to the exit.
By now British Buttonhooks’ dimmest director can see that the buttonhook business is tricky enough, without getting hooked up in a different business with risks of its own and no matching rewards. Some bright director of a financially minded company may then turn up to take the pension business off his hands. This treatment has already been applied to the closed funds of life assurance companies — zombie-like creatures now restored to some sort of life and usefulness. Expect to see it applied to closed pension funds, too. I see that Ed Truell at Duke Street Capital is working on it. Soon the conventional company pension will have gone the way of the company car. Both of them were tax-efficient, but in every other respect inefficient and even unjust. Schemes that link pensions to final salaries work by cross-subsidy: leavers subsidise stayers, the young subsidise their elders, women subsidise men and the shop-floor subsidises the board. Ten years ago, when the funds were overflowing with money, this injustice was less obvious. There is no excuse for it now.
Ask him again
The biggest drain on these funds is easily identified. In his first year as Chancellor, Gordon Brown rewrote the rules and taxed them for £5 billion. He has taxed them again for £5 billion or more in every subsequent year. To replace their lost capital, they would now have to raise £100 billion or more. With that £100 billion they would now be amply funded and the CBI could calm down. In that first dawn of New Labour, Tony Blair asked Frank Field to look at pensions and think the unthinkable. He thought about the Chancellor’s raid on the pension funds, and finally asked for an appointment in Downing Street and explained what the consequences were likely to be. It got him nowhere. ‘That,’ said the Prime Minister, ‘is not how it has been explained to me.’ At the next reshuffle Mr Field learnt that his thoughts were indeed unthinkable, and he retired to the back benches, to enjoy the limited satisfaction of having been right. Ask him again, Tony.
Busting out all over
The Law of Unintended Consequences has yet to be enacted by the Department of Trade and Industry, but it is in force there, all the same. Two years ago Patricia Hewitt was persuaded that we would all be more enterprising if we weren’t so scared of bankuptcy. Why, in America, people went bankrupt and picked themselves up and went on to great things. It was time for the DTI to relax our own rules and remove the stigma. Wouldn’t the banks be more reluctant to lend if they couldn’t expect to get the money back? Oh, don’t cavil. So the DTI gave us all a new Enterprise Act, and guess what? More and more of us are going bankrupt. The numbers have now broken every record. Shock, horror. It will be blamed on the banks, as it so often is. If they carried on lending, that had only served to carry their customers out of their depths. Not that they intended it.
City men, City matters
I empathise with David Morier Evans. He reported the money market for the Times, he found a berth on the Standard, and he wrote a book about the City and its denizens. My book (just to remind you) is called A City Spectator, his was called City Men and City Matters — first published in 1851 and now reissued at £14.50 by the admirable house of Hindsight Books. The old place does not seem to have changed much or at all. The staple commodity, then as now, was information. You could pick it up in the different coffee-houses, each catering for its own market — the Jamaica, the Baltic, Garraway’s, the North and South American…. Sandwiches, pale ale, stout and sherry for lunch, champagne and anchovy toasts for the punters in the afternoons, cigars and coolers in the evenings. Quietly seated at one of the side-tables, late in the day, a figure could be seen scribbling on small slips of paper. This apparently absurd employment, we are told, is the modus operandi of the City-article collator. He, too, is a part of the scene.
Huffing and puffing
The biggest punt of all had marked the City’s recurrent love affair with new technology. Before the internet, railways were the superhighway of the moment, puffing and puffed as the wonder of the world: ‘Nothing has created so marvellous a change as the great iron revolution of science.’ They certainly made fortunes for promoters and share-pushers, if not, in the end, for investors. This was a bubble of South Sea or dotcom proportions. Evans measures it against its predecessor, 20 years earlier, when the new issues descended in order of merit from the laudable principle of life assurance to a patent washing company, proposed to be established on the Isle of Dogs. In the City, what goes around, comes around.