GIVING money away is rather harder than getting it back. The Chancellor of the Exchequer’s misplaced generosity is proving ludicrously expensive. The tax credit system to which he is so wedded has been so chaotic that HM Revenue and Customs is now expecting that it will not be able to reclaim £961 million of overpayments. It might as well just round up the number and admit that £1 billion has been handed out to the underserving.
The scale of the tax credits fiasco is mind-blowing. As the National Audit Office revealed yesterday, the level of overpayment was actually worse in 2003-04 than was originally estimated: £2.2 billion instead of £1.9 billion. What is more, those responsible suspect that they will have handed out a similar amount to the wrong people in 2004-05.
Yet only yesterday a Government minister was lauding tax credits as a policy. David Blunkett, the Work and Pensions Secretary, outlined his plans for the future of the welfare state. It was not immediately obvious how this platter of platitudes was going to ensure that a majority of the 2.6 million people now on incapacity benefit might be brought back into the workforce.
Mr Blunkett has defined eight principles for Welfare Reform. They start with the aim: “Help people to help themselves by offering a ladder to self-reliance and self-determination, not merely a safety net in time of need.”
The second principle states: “See work as the best route out of welfare.” Under this heading comes the assurance that the Working Tax Credit has helped to make work pay. “We will build on this success,” says Mr Blunkett. That is likely to raise a hollow laugh from those who have had to battle to get the money that the credits promised them and which has instead been shovelled into over-payments that will never be retrieved.
Mr Blunkett’s grandiose plans promise, as Principle 7, to “address the root causes of poverty and overcome inter-generational disadvantage and exclusion”.
This worthy aim lacks novelty value, since addressing the issue of poverty has been high on the Chancellor’s agenda ever since he came to office. But Mr Blunkett perhaps beats even the Chancellor for pointless rhetoric. “Our actions will seek to underpin and reinforce the capacity of communities as well as families to contribute to a renewed civil society,” he says.
The CBI seems to have been distinctly underwhelmed by Mr Blunkett’s principles. What, it asked, was the Government planning to do about the people on long-term sick leave who account for a third of the working time lost in Britain? That is a tough issue to crack, with many of the long-term sick being in the public sector. No wonder Mr Blunkett opted for twaddle instead.
Suicide watch
ANY company continuing to run a defined benefit pension scheme is risking “corporate suicide”. That is the stark warning from Alexander Forbes, the pensions consultancy.
Although a majority of companies have closed their defined benefits schemes to new members, the firm argues that the only sensible option is to close such schemes completely. Otherwise, the costs will continue to escalate and the company’s freedom of action will be severely curtailed. it said.
The pensions regulator is the new bogeyman in British business. For companies with deficits in defined benefit schemes, he will have the loudest voice in the boardroom. If British Airways wants to resume dividend payments, it will require permission from the regulator. If BT liked the idea of making a major acquisition, it would need the approval of the pensions regulator.
The prospect of having an outsider exert such power over their actions might be enough to persuade most companies that they would like to rid themselves of the pension obligations that subject them to his rule. But Alexander Forbes points out that the financial consequences of continuing to run defined benefit schemes are also nastier than many realise. On Alexander Forbes’s calculations, if companies with a “significant” deficit relative to asset value keep their funds open to future accrual, they will see the buyout cost increase by about 30 per cent of payroll every year. Do not wait another moment, close that fund now, is its message.
Continuing to run a defined benefit fund can, however, serve as an effective poison pill. According to Punter Southall, another consultancy, two thirds of private equity houses have abandoned deals when the extent of their pension liability became clear.
So investors might want to encourage companies to buy out pension liabilities, even if it causes short-term pain.
Futures fears
INVESTORS backed Phillip Bennett as the life and soul of Refco when the world’s reputedly biggest independent futures broker went public only two months ago. In the American fashion, anathema under UK governance codes, Mr Bennett was both chairman and chief executive of a financial group that was usually highly profitable but had occasional contretemps with regulators round the globe.
Wall Street would naturally react somewhat negatively when it found out, so soon after the flotation, that all was not as straight as it had seemed. Mr Bennett is thought to have assigned, to companies he controlled, more than $400 million (£228 million) of possible bad debts on Refco’s books and then happily succeeded in collecting them.
The accounts were, however, swiftly repaid with interest. Refco should in theory be no worse off than before, apart from having its Batman and Robin on gardening leave. Yesterday’s fall of one third in the share price might look an overreaction. But this is the derivatives business.
This is an industry where huge profits are matched by losses. It is the world of Enron, whose contracts were so mind-boggling that few questioned the losses and liabilities parked off the balance sheet. It is the industry that Warren Buffett in public and almost everyone else in private have identified as a potential site of unnatural financial disasters. Refco’s share price fall reflected fear, and a fear that is not wholly irrational.
- BANKERS will be reaching for their files this morning to reassure themselves that the letters Stephen Byers sent them were not written with invisible ink. The then Transport Minister penned his missives to persuade banks that they could feel safe about funding the modernisation of London Underground. The letters appeared to protect the banks against unpaid debts should the companies involved run into trouble, making the deal seem risk-free. As Ken Livingstone takes action over LU, the banks will be re-reading those comfort letters.
