DAVID WILLETTS, the Shadow Secretary for Work and Pensions, has no chance of shaking off his “Two Brains” nickname now, even if he wants to. His speech on pensions given to Politeia, the think-tank, last night was not only intelligent, it was practical. And practical intelligence is the best variety.

He compared the pensions crisis to terrorism and global warming in its seriousness. He went on to suggest that it might lead to a wave of corporate bankruptcies, increased taxes and the dislocation of local government. These sorts of assertions are sure to make anyone sit up and think.

The truly intelligent parts of Mr Willetts’ speech do not describe the implications of where unresolved pension problems might lead us, however. Nor does Mr Willetts’ wideranging analysis of the state of long-term saving in this country — perspicacious though it is — necessarily add a great deal to the debate. We know that public confidence in pension saving is at a low ebb and that the cost of providing for the nation’s growing cohort of retired people is likely to rise. We also know that Something Must Be Done.

Mr Willetts shows his best side by outlining just what might be done. Yes, he made the odd party political point in his discourse. But the ideas he developed need not stand or fall on which party holds power and it would be a shame if Westminster pride obstructed progress.

Two Brains says that annuities lie at the core of the pensions crisis and that uncertainty over life expectancy makes them look unattractive to institutions and individuals alike. And annuities are unattractive because the incomes delivered are fixed according primarily to the income paid on government bonds at the time of purchase. Since no one can know for sure how long they will live, they cannot make an informed decision about whether it is wise to swap a lump sum for a lifetime of income.

If an individual lives for 25 years after retirement it can be assumed almost any annuity represents a good deal. If you live 25 days, it will not. The fact that annuity purchase is often compulsory does nothing to endear the instruments to the public.

Similar imponderables affect institutions or companies that buy annuities in bulk on behalf of ex-employees. The risks may be less polarised, but companies are financially vulnerable to changes in the life expectancy of those they provide for.

Mr Willetts reckons there are four ways forward. All concern the way the state borrows money. Mr Willetts’ proposes that “longevity bonds,” where yields on gilts vary according to benchmark measures of life expectancy for the population as a whole, might be introduced.

He also suggests that the state might issue so-called “survivor bonds” where returns reflect the length of time lived by particular group of people who club together to buy. In addition, he says that the state could issue more longer-dated government bonds because this would leave providers of annuities better able to match their incomes with their liabilities. Finally, Mr Willetts suggests that the State could issue a refined form of index-linked gilt where yields were designed to grow at no more than the same 2.5 per cent annual rate at which most occupational pension schemes enhance benefits.

Mr Willetts favours the longevity bond option, although he wisely wants to hear the views of the financial services industry before comitting to anything. The really intelligent solution, however, may be for Mr Willetts and his opposite numbers in Government to push on with all four suggestions simultaneously.

Hitting the buffers at Jarvis

FOLLOWING the directors’ money rather than their mouths has often proved a smart strategy for investors. Sadly it fails when the directors gullibly believe their own propaganda.

Steve Norris, chairman of Jarvis, appears to be a better communicator than judge of business. He doubtless thought he was snapping up a bargain in February, when he bought 50,000 of the PFI specialist’s shares at 144¼p. They had just collapsed by 30 per cent on the latest profit warning and the departure of the director responsible for educational contracts. Mr Norris felt the market overreacted to such short-term lapses. After all, he was buying at 70p below the price when he had taken the helm, let alone the 566p peak of two years earlier, when Jarvis was valued at more than £800 million.

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