OF ALL the pension proposals outlined in this week’s Turner report the Britsaver has attracted the least attention. Since it has caused relatively little controversy, the Britsaver could also be one of elements of the report that survives.
But Britsaver is an accident waiting to happen. If introduced, the law of unintended consequences is sure to kick in, creating scores of small and medium-sized problems. There is a serious risk it would also create one very large difficulty.
Here’s how. Lord Turner suggests that £150 billion could be staked in Britsaver accounts. It also commands that Britsaver cash is managed for fees of no more than 0.3 per cent. This, in turn, means that Britsaver cash is likely to be managed on a passive, index-tracking basis where shares and bonds are bought in a purely mechanical, computer- driven manner. It would have to be passive because the active, human touch is expensive.
There will be those who will cheer the dereliction of active asset managers. Many are accused of overcharging and deliver no more than the passive manager would deliver in any case. There is also a strong body of opinion which suggests that the passive management is of a low-risk style suited to pension savings. So if Britsavers take off, active pensions investment managers could be chased off the game by being characterised as too risky.
Except to say the relative risks in active and passive investment management are not clear cut, set this issue on one side. The effect of the low charges and the perceived low risk may mean that lots of of pension savings shift to the Britsaver model. So while £150 billion might be invested in Britsaver accounts, there might be twice as much again invested in the manner of a Britsaver.
Turner envisages that the funds will be invested in shares and bonds. The value of all UK listed companies is about £1,500 billion, with a similar amount in UK government and corporate bonds. Britsaver and pseudo-Britsaver money could be at least 10 per cent of the total. It might be much more.
And herein lies the danger. Investors demonstrate their willingness or unwillingness to provide capital to companies and governments by attaching prices to shares and bonds traded in the secondary market.
Capital is not perfectly allocated to companies and governments in this way. But the market provides a decent mechanism for owners of capital to feed money through to those that want to use it. It has served this country pretty well over the past 200 years. It may not be the only reason why living standards have steadily risen over the past half-dozen generations, but it has played its part.
If Britsaving passive investment takes off, more capital could be invested in the wrong companies at the wrong price. It has happened before, as when trackers chased Vodafone shares at the time of the Mannesman deal in 2000. More money could be invested in UK government bonds at the wrong price, too. Left to themselves, market operators correct wrong prices and can be left to blame themselves for their mistakes.
But Britsaving could see the Government having to shoulder blame for investment failures that will take eternities to correct. Britsaving might even disrupt the flow of capital from investors to companies and governments. And that really would spell trouble.
Boat comes in
MONEY for nothing is hard to refuse, but there is something distinctly iffy about worthies queuing to join P&O’s board when it has already agreed to a takeover. Sir John Collins, the senior non-executive director, due to retire on New Year’s Eve, will understandably stay on. It is less clear why Richard Cousins, who is making a profitable exit from BPB, will join next week, three weeks ahead of schedule.
Moreover, Baroness Symons of Vernham Dean, former union boss and minister, and Mike Turner, the BAE chief executive, joined as arranged on Thursday and Richard Gillingwater arrives in the new year.
It hardly seems worth it. But wait a minute. P&O’s accounts reveal that non-executives are normally paid a base fee of £30,000 a year “subject to 12 months’ notice by either party”, or at least six months for change of control. Whether it is a case of gravy trains or gravy boats, it leaves a horrid taste.
Tsar turn
A pensions tsar, or tsaritsa, will join a swelling family fast outgrowing the Windsors. It seems ages since Sir Richard Branson, litter tsar, helped Baroness Thatcher to pick up paper in the park. Social workers soon will need to consult the tsarist community and consultants will identify a tsarist pound. As the Russian originals found, tsars are scapegoats, set up by those wishing to avoid responsibility. They plainly need support from a tsarist workers’ union and preferably their own gated tsars’ village. These royals will not be in fashion for ever.
Gloom shows silver linings
HALIFAX, the biggest mortgage lender, has recorded annual prices rises averaging 4.5 per cent a year over the past three months. The Bank of England has just recorded the biggest number of mortgage approvals since the housing boom ended in the summer of 2004.
Some consumers may believe that happy days are here again for the housing market. More buyers means higher prices. And if you think that is the norm, it might seem perfectly safe to give the plastic a seasonal battering and rely again on rising equity to cover the debt.
Reality is modestly different. Halifax may now be recording rises while others see only price stability, but its annual rate of house price inflation in the latest three months owes much to the gloomy autumn of 2004. Halifax then reported prices falling in three months out of four. In the last boom, annual rises peaked at 27 per cent in the autumn of 2003 and secondarily at about 22 per cent in summer 2004, just before the Bank of England lifted its interest rates to 4.75 per cent and the edifice of boom crumbled.
That boom was a rational response to changing circumstances. Once potential buyers believed general inflation was and would remain under control, they could rely on relatively low interest rates. That adjustment has been made. Until another is needed, prices are most likely to move in line with earnings, which determine their ability to buy.
Consumer spending, is now recovering, like the homes market, from the gloom after the boom, when people feared that prices will crash. The crash senario, which was always a long shot, is now most unlikely.
