Turning the screw on pensions

THE pensions crisis is growing. There is already a gap of £27bn between the amount we save for retirement and the amount we ought to put by. According to the Association of British Insurers, the decline of final-salary pension schemes stands to widen that gulf by £5bn a year.

Yet the noose around these schemes,which guarantee employees pensions based on their pay at retirement, is tightening. The soggy state of equity markets and the tendency of people to live longer have made the schemes increasingly expensive to fund. BP today became the latest company to reveal that its scheme is now in deficit and a new accounting rule, known as FRS 17, will force all corporates to declare if their pension funds are in surplus or not.

Defined contribution pension schemes provide a convenient way out because they do not provide employees with any promises for the future. They also have implicit Government backing.

The Pensions Green Paper, A New Contract for Welfare: Partnership in Pensions, suggested the workforce has become so much more mobile that old-style pensions arrangements may no longer be appropriate. But research from the National Association of Pension Funds shows this supposition is wrong. In the past 20 years, people over the age of 25 have stayed in the same job for roughly the same amount of time, so what was valid then is valid now.

Moves are afoot in Europe to force companies to ensure their pension schemes are fully funded at all times. This would sound the death knell for final-salary pensions. Many corporates have already given up on them. They should be given no further encouragement. Defined contribution plans may be cheaper. But they do not bode well for a comfortable retirement.

Reasons to be cheerful
SIR Christopher Gent looks like a cheerful fellow. The Vodafone chief executive is frequently pictured with a smile on his face as he tells the world that his mobile phone company is in a class of its own.

To many investors, Gent's smirking countenance adds insult to injury. Vodafone shares have fallen almost 70% since peaking at 399p two years ago. They have been single-handedly responsible for wiping around 800 points off the FTSE 100 index. Market sentiment is partly, but not entirely, to blame.

Vodafone does not have as much debt as other telecoms companies. Like them, it overpaid for acquisitions at the top of the market. Unlike them, it paid for its purchases largely in shares. It is not therefore burdened by loans that it cannot repay. It is burdened by an overhang of stock, much of which was placed with temporary holders who have been dribbling shares out ever since.

Since its peak, Vodafone's market value has sunk by £180bn, more than five times the £35bn that has been wiped off the value of Marconi.

In 2000 Sir Christopher outraged investors by taking home £6.9m in salary and bonuses. Last year's package, to be revealed with this summer's annual report, is likely to be more modest.

More significantly, the group has decided fundamentally to rejig the way it pays boardroom executives. The pay structure to date has been widely criticised and hideously complicated. Discussions are continuing with big shareholders but considerable progress has already been made. The remuneration committee has dispensed with the services of outside consultants and is doing the job itself. The idea is to award bonuses if Vodafone outperforms a number of global competitors. The comparator group will be largely American but the pay awarded will be European, not US, in magnitude.

Vodafone has done little to endear itself to investors in recent years. The concessions on pay show it is beginning to take their concerns to heart.