The wrong type of pensions policy

TURBULENCE in the markets, rigid new accounting rules, more layers of regulation and the open ended financial commitment companies take on when they set up final salary pension schemes are taking a mounting toll.

According to the National Association of Pension Funds, 46 companies closed their final salary schemes to new entrants during the year compared with 18 last year and a single-figure total the year before that. Naturally, there has been a corresponding increase in the growth of defined contribution schemes, where the money goes in but there is no guarantee of how much will come out.

Companies cannot be blamed for protecting themselves, but the trend is potentially bad news for individuals and, by implication, for the Government. Defined contribution-schemes depend on successful investment. But most people in this country are not sufficiently clued-up about markets to invest their pension money safely and wisely, and the fund management industry has a recent history of overcharging for second-rate service.

It seems to me that in 30 years' time individuals and Governments will regret the switch. All the evidence suggests that people are saving nowhere near the 30% of salary they need to finance a period of retirement that may turn out to be not much shorter than their working life. So their pensions are likely to be inadequate even before the effects of poor investment performance and lousy annuity rates.

This is a disaster in the making. The decline of defined benefit schemes and inadequate defined contributions mean that the overall-level of pension provision is getting worse. And short of some form of compulsion, there is nothing Government can do about it.

Spending test

CHANCELLOR Gordon Brown was right when he said in his Pre-Budget Report last week that Britain was better prepared now than in any previous global downturn, to withstand the worst effects of recession.

Inflation, unemployment and interest rates are lower than they have been for a generation, growth remains robust and the latest evidence from the High Street is that the consumer has responded very positively to last month's half-percentage-point cut in interest rates. It came at the right time and gave just the boost shoppers needed to persuade them to spend their way to Christmas.

Having done all this, it is no surprise that the monetary policy committee today decided not to lower interest rates any further. There are clear divisions on the committee between those who fear a slump and those who fear a resurgence of inflation. Last month the recessionists had their day, but this time the inflation hawks reasserted themselves.

But just because the MPC has done nothing does not mean that the threat to Britain has receded. If consumer confidence is maintained it will certainly help keep the economy on the even keel the Chancellor hopes for. But if unemployment starts to rise next spring, if the monthly increases in house prices begin to tail off, and if the year-end annual pay rises are rather less generous than people had been quietly hoping for, their reaction will be to rein-in their spending. That could change the mood and the economic outlook significantly.

The next three months will be the test. The first quarter is often among the leanest. If business slumps, the bears will feel vindicated; if the spending boom continues, maybe we will be all right.

De Beers block

DIAMONDS giant De Beers has confirmed that the European Commission's trust busters are investigating its 'supplier of choice' programme unveiled last year. Not surprisingly, it revealed Brussels' intervention with considerably less fanfare than accompanied its supplier of choice announcement.

De Beers had hoped to have the scheme up and running by July this year, but it cannot proceed until it gets the all-clear from Brussels. The cost to De Beers, and therefore to Anglo American shareholders who control 45% of the diamond company, is unclear - partly because De Beers won't say and partly because no-one outside the company really knows what the supplier of choice programme means.

De Beers will say only that the scheme will change the way it selects its customers - referred to as sightholders - and improve the distribution of diamonds. This, it claims, will ultimately increase overall demand for gems, though only sightholders who 'meet its criteria' will be able to buy them directly from the company.

However, given the hype and heavy promotion that has surrounded the programme, it is probably safe to assume that the cost of the delay is substantial. De Beers' willingness to engage in a long and expensive negotiation with Commission investigators also shows there must be gold, or rather diamonds, at the end of the rainbow.

De Beers nevertheless may wish it had not gone down this route. Its cartel-style of operation has long caused it to be banned from doing business in America and the Brussels investigation can only spell more trouble. Dropping its plans and returning to its old ways is not an option. It may yet be forced to make far greater changes.