THREE cheers for the restoration of the link between rises in old age pensions and average earnings? Not from this quarter. It is wrong to restore the earnings link for the simple reason that it involves the Government making a financial promise that is hard, perhaps even impossible, to keep.
The Government must commit to providing this safety net because we live in a civilised society. It must provide a safety net for those who are unable to work because of ill health, ill fortune or because they are old. But if it commits to do any more than the minimum it runs the risk of misleading people. Financial guarantees, as with any kind of guarantee, can prove very expensive — as Equitable Life policyholders will attest.
The Government should not do anything that might have to be reversed. It cannot renege on a promise to provide people with the means to keep themselves warm, dry and fed. This is a promise it must make and must keep. It is also, crucially, a credible promise.
Of course it would be nice if the Government provided us all with a pension income generous enough to keep us in the lap of luxury. But it would also be nice if money grew on trees and the world lived in peace. But some things are just not going to happen.
Besides, no one is going to believe that the earnings link with pensions is now set in stone. A Conservative government severed the link and a Labour one now says it will be restored. But Conservative politicians now want to restore the link and Gordon Brown appears to have changed his mind on the issue. This gives plenty of scope for a U-turn again.
It remains far from clear that Messrs Blair and Brown have committed themselves to change. The top line of the story is that the link will be re-established in 2012. But caveats lurk only just beneath the surface. It transpires that E-day might come sometime after 2012. Meanwhile the issue of affordability — a real and sensible concern of the Chancellor’s — has not disappeared. It is still perfectly conceivable that E-day will not materialise.
If the earnings link remains in the long grass it will give satisfaction to those who worry about the cost. But the uncertainty is the real worry here because it stops people from taking action. Mesmerised and perplexed by the uncertainty, too many people are doing too little to ensure financial security in retirement. The uncertainty may last until at least 2012. You might argue that the uncertainty stretches back two decades as well.
Instead of wittering about restoration of the earnings link the Government should be doing everything it can to ensure that the British economy is kept healthy and is equipped to create wealth now and in the future. That is the surest way to ensure that our oldest and dearest are kept comfortable.
The Government may encourage individuals to save, and employers to save on the behalf of employees. But if a case can be made that the state pension is too mean, and that the state can afford to be more generous, the payment should be upgraded as a one-off. As long as appropriate caution is exercised, the state handout might be raised by more than inflation on an occasional or even frequent basis.
The promise, however, must be to do the bare minimum. And the bare minimum is to raise state pensions in line with prices, not average earnings. ()
Grocery chain
MERGING the grocery distributor Nisa with Costcutter looks like the first step in creating some substantial fortunes, especially for the two bosses. The combination has the potential to reduce risks and trade more stably. That could make the whole worth more than the parts and fatten up the business by cutting back-office costs.
Sadly, there seems to be no reason why the combination will have any special attraction to customers so as to sustain rapid growth or stop the advance of Tesco, Sainsbury’s et al. Rather, it would create a means for a group with more clout to challenge the big two.
This could be Somerfield, Wal-Mart — if it can and wants to go into neighbourhood shops — or a continental retailer needing a ready-made base in Britain. Shareholding customers who vote on the deal should be concerned with maximising their interest in this transition, not preserving a way of life.
Dollar avalanche a threat to all
ACTION by world leaders to cure trade and foreign exchange imbalances triggered the 1987 share crash. In a febrile atmosphere of speculation, all concerned will be anxious to make sure that this does not happen again.
America’s trade deficits are running at £9 billion a week, which has to be made good with capital inflows. No wonder bankers and the IMF worry that trade imbalances make the world economy vulnerable.
At their latest meeting, top finance ministers at the IMF agreed that the dollar should be allowed to decline against all Asian currencies and called for China’s yuan to rise faster. The danger is that the steady sales of the dollar implied by trade deficits make it vulnerable to tip into collapse, taking financial markets with it.
Ben Bernanke, in his first formal testimony to Congress as Chairman of the Federal Reserve, admitted: “While it is likely that current account imbalances will be resolved gradually over time, there is a small risk of a sudden shift in sentiment that could lead to disruptive changes in the value of the dollar and other asset prices.”
Adjustment by avalanche would suit no one. It would hurt China, the country with the biggest dollar reserves, and oil exporters, who would effectively see the price of their oil devalued. A steep dollar slide would hurt savers and business confidence globally and would inevitably overshoot.
Central banks and finance ministers will act to forestall that, at first simply by claiming their own currencies are rising too fast, but speculators will not be so anxious to restore good order.
Buy the book
IT CAN only be a matter of days before HMV, the record shop that owns Waterstone’s, dusts off its plan to buy Ottakar’s. Since trading seems to have got worse since the deal was referred to the Competition Commission, the takeover terms could be much less generous than they were when this deal was first mooted. But given the recent improvement in consumer confidence and high street spending, Ottakar’s owners might push for a price starting with a 4. Since a merger will bring big benefits, they might just seal a deal at 400p plus.
