Pensions in crisis? Restoring confidence A note on a conference held on February 26, 2003

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Trustees Governing Council Minos Zombanakis (Chairman) Sir Brian Pearse (Chairman) David Bell David Bell David Lascelles Rudi Bogni Sir Brian Pearse Robert Bench (US) Manny Bussetil Staff Peter Cooke Director - Andrew Hilton Bill Dalton Co-Director - David Lascelles Professor Charles Goodhart Manager – Fleur Hansen John Heimann (US) Henry Kaufman (US) Angela Knight Richard Lambert John Langton Dame Judith Mayhew John Plender David Potter Sir Brian Williamson Minos Zombanakis

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Cover image: Getty Images This was the second year that Aberdeen Asset Managers sponsored the Cityforum Pensions Conference, this time in conjunction with Hewitt Bacon and Woodrow. Pensions issues are terribly serious, and at times we must all feel concerned (or overwhelmed) by the differing short-term interests of state, pensioners, working people and the private sector. The contributors were spectacular at raising the debate: they shared knowledge and imaginative solutions, all delivered with remarkable good humour. In a day, many issues were covered; so many thanks to Cityforum for their stylish organisation and to Andrew Hilton of the CSFI for valiantly managing to capture the key points of the day.

Piers Currie Aberdeen Asset Managers

Cityforum Ltd devises and organises conferences, round tables and management education programmes on a broad range of subjects with a policy dimension. These include defence, security, banking, risk, pensions, health and PFI/PPP.

Early in 2002 Cityforum arranged a widely-noted day-long round table on pensions, and this February initiated Pensions In Crisis? as a response to the government’s Green Paper and Inland Revenue proposals on the subject. This report is the result of those deliberations.

Marc Lee Chairman, Cityforum Ltd Ringwell lane Norton St Philip Bath BA2 7NZ Preface

This paper is a not-entirely-accurate (but as accurate as I can make it from verbatim notes) procès-verbal of a one-day conference held at the National Liberal Club on February 26, 2003. The title of the conference was Pensions in Crisis? Restoring confidence (though in some of the conference material, the question-mark seemed to disappear). It was arranged by Cityforum Ltd, the public policy conference organisers, and was sponsored by:

• the Centre for the Study of Financial Innovation, a not-for-profit think-tank (of which I am the director); • the Retirement Income Reform Campaign, a cross-party group (of which Oonagh McDonald, who chaired much of the conference, is the director); • Hewitt, Bacon & Woodrow, the leading actuaries; • Aberdeen Asset Management (which is generously covering the cost of producing this note); and • Pensions World.

While I have tried to reflect the main points that were covered in both the presentations and the discussions, it will be clear to anyone who reads what I have written that it was a very full day in which many, many issues were covered and in which a lot of people expressed powerful concerns about where we stand today and what we can expect in the future. I apologise if I have, in any way, misrepresented what people said; if so, it was entirely inadvertent.

What were the themes that came through? At the risk of gross oversimplification, I would point to:

• a fairly general feeling that the Department of Work and Pensions’s recent Green Paper fails to address the enormity of the problem which the UK faces – but that, in contrast, the Treasury/Inland Revenue paper is at least starting to tackle the right issues; • a feeling (which is reflected in the previous point) that the government as a whole still doesn’t have a worked-out, joined-up strategy for pensions (it was widely noted, and deplored, that the government had not made available anyone to explain its position at the conference); • a lack of clarity about how the government envisages the evolving relationship between the roles of the state and the private sector when it comes to pensions provision; • a strong sense that the long-term poor will not be well-served by the kind of tinkering that is still envisaged; • concern about the fragmentation of pensions products, which inevitably exacerbates consumer confusion – and hence militates against increased pensions savings; and • specific concerns about sex discrimination, the death of the equity culture (and the shortage of alternative assets), the fairness of compulsory annuitization, the exigencies of a “one percent world” etc, etc.

There is an awful lot to digest in this paper. I was delighted to have the chance to write up the proceedings; I hope they will have some impact in the broader debate on pensions provision that is underway.

Andrew Hilton CSFI April 2003

NOTE: A follow-up meeting was held on April 10 to discuss a draft of the present report. A brief summary of the recommendations which emerged from that meeting is given as Annex I, on pages 37-38.

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NUMBER SIXTY-TWO MAY 2003 Pensions in crisis? Restoring confidence A note on a conference held on February 26, 2003 Andrew Hilton Foreword

The current round of consultation on the government’s proposals for pension reform will influence the provision of retirement income in the UK for many years to come. The importance of the outcome cannot be overstated.

We start with a state system of pensions that is characterised by a universal retirement benefit which is low, by European standards, and programmed to continue steadily falling relative to average earnings. This is propped up by an extensive and expanding system of means-tested benefits, projected to cover well over half of the country’s elderly population in years to come.

The private pension system is dominated by the occupational pensions sector, which has in turn been dominated by final salary schemes. That dominance is now rapidly dwindling, to be replaced by defined contribution arrange- ments. There is much anecdotal evidence that lower contributions are being paid by employers to these replacement schemes.

These changes are taking place in a demographic climate of a rapid ageing of the population, which is a worldwide phenomenon, and an economic climate of falling stock markets, which are putting a severe strain on the solvency of financial institutions.

The state pension is the foundation on which all other retirement savings are built. At present, the state system is extremely complicated - impossible to understand - for all but a handful of experts - and produces strong disincen- tives to save amongst a large and crucial sector of the population. There is a widely-held view that a radical overhaul is needed to simplify the structure and reduce the disincentives to save for retirement. The Inland Revenue has shown brilliantly how this can be done, with its proposals for radical simplification of the pensions tax system.

Private and occupational pension provision is badly in need of a restoration of trust and confidence. Rising costs due to increasing longevity and low interest rates, coupled with three years of falling equity market prices, have had a major impact. This has led to cuts in benefits in pension plans, cuts in payments from with-profits policies and sharp increases in annuity rates. There are rational causes for all of these but they have come as a huge shock to unsuspecting consumers. Perhaps the biggest failure in recent years was not explaining the risks clearly enough. In future, honesty, transparency and openness must be the watchwords. There is a great need to educate the public about the key aspects of long term savings in order to give them the confidence to embark on and sustain retirement provision.

Above all, if people are to save sufficient during their working lives to provide for their retirement, they will either have to be compelled or incentivised to save – fear of poverty in old age will not do the trick on its own. Compulsion is not the simple panacea that many seem to believe. It brings its own, different set of problems, such as how much to require people to save and how to guarantee the outcomes. The government appears set against compulsion, but regrettably has failed to offer any of the strong incentives to save that will be needed instead.

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It is easy to talk of crisis and, at times, the problems bearing down on pension provision may feel overwhelming. However, many solutions to those problems have been and are being put forward by organisations and individuals. A healthy political debate is taking place, but very soon the government must pull all the threads together and take decisive action.

Michael Pomery Hewitt Bacon & Woodrow

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1. Introduction

On February 26, a one-day conference was held at the National Liberal Club in London to discuss the crisis of confidence in the UK pensions industry. A list of participants is given as Appendix I, Two key and the agenda is given as Appendix II. reports... This conference was prompted by the recent publication of two government reports:

• the Department of Work and Pensions’s Green Paper, “Security, simplicity and choice: working and saving for retirement”; and • the Treasury/Inland Revenue paper, “Simplifying the taxation of pensions: increasing choice and flexibility for all”.

It was agreed that Andrew Hilton, director of the CSFI (a co-sponsor of the conference), would write up the discussions, which are being published as a CSFI paper with financial support from Aberdeen Asset Management. 2. Session one: The government’s response to the pensions problem – what is it? is it sufficient?

Oonagh McDonald began by noting that the conference had attracted positive comment on the previous night’s “10 o’clock news”. At the same time unfortunately, the pensions issue is a political hot potato, and neither the government nor the most affected Departments were willing to produce senior speakers – which was a great pity, but possibly not surprising. Nevertheless, the government “will be able to read the press clippings” (and this Note, AH).

She then introduced the first set of panellists:

• Steve Webb MP is the LibDem spokesman on work and pensions; • Carl Emmerson is the pensions expert at the IFS; • Robert McDowell is an independent consultant with iconoclastic views (and a pipe); • Kevin Wesbroom is a senior actuary; and • Jim Cousins MP (the nearest we had to a government spokesman) is a member of the Treasury Select Committee. A. Steve Webb MP

Webb began by noting that the two reports were “a whistlestop tour of the pensions crisis” in Britain today – though the Green Paper is the “wrong colour”, since the crisis is too urgent for green. Post-Sandler, Pickering etc, the government should be taking tough decisions not consulting. He noted that it is envisaged that there could be tax changes in 2004, and that there could be an Act by April 2005; but “this is too slow”.

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Moreover, he noted, the Green Paper is a bit complacent and a bit vacuous: it assumes the state pension system is sorted, which it is clearly not. There is, he suggested, a bipartisan consensus that the Revenue’s notes are “more interesting”.

Pensions are Illustrating the shortcomings of the Green Paper, he noted that it contains a chapter on women’s rights - which is progress. But “we need more information”. For him, women are the poor a feminist pensioners, and “nothing in the Green Paper will change that substantially”. In his view, any issue shift of pension provision away from the state towards private provision must be prejudicial to women, since private pensions reinforce earnings discrimination. There are, he said, “women with pensions of only one penny a week”.

That said, Webb also noted that “we wouldn’t have a pensions problem if we were all 21". Unfortunately, there is “a hell of a lot of legacy” to work out.

What is the answer?

For Webb, the key has to be simplification – “but every government makes it more complex”. In addition:

• the government must pull out of second tier pensions; and • the government must redistribute pensions in favour of the elderly.

He said he was against raising the state pensionable age, but the important thing is to “make it better at 75” - which means getting away from the idea that everything kicks in at 65. He supported the idea that there should be a mix of work and retirement, and the phasing in of eligibility for benefits.

What about compulsion? Webb felt it was inevitable: as he put it, voluntarism has been tried and has failed. In the meantime, however, he endorsed the government’s attempt to simplify the system. “It is not a question of more advertisements.” In his view, compulsion will be the only way to rescue stakeholder pensions because it is the only way that “makes people knock on the door of the providers”. At 1%, providers “cannot afford to come to you”.

Summing up his views, Webb argued for:

• “a damn good state pension” for the elderly; • “something” at 65; • mandatory provision for those who are younger; and • a better pensions deal for women. B. Carl Emmerson

Emmerson began by pointing out that state funding of pensions in the UK is still low relative to other countries, and is forecast to remain low because of our approach to indexation. In his view, “if we keep to politicians’ promises, we could still cut taxes”. This is a very different situation to that in, say, Greece, where promises are very large (and, if met, would in fact be equivalent to doubling the amount spent by the UK government on pensioners).

In that sense, he said, “the UK state system is affordable”.

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However, since indexation means that pensioners will tend to get less in real terms over time, the key question is whether we can fill the gap with private savings. Are people saving enough?

This is, Emmerson admitted, a hard question to answer. Private pensions provision in the UK is relatively high; 80% of middle earners have private pensions, which is good. And many of those who don’t have private pensions may have good reasons; they may be earning too little, they may have spent too much time out of the labour force, or they may have too low a level of liquid financial assets. Plus, he said, if there is a savings problem in the UK, it may not be a problem specific to pensions; it may be a generally low level of savings.

That brought him to the nub of his argument. Given the low levels of savings, longer life expectancy and lower expected investment returns, “something must change”. The replacement rate is now 63%; in the future, it could fall towards 50%, which is much lower than in the past. Even allowing for lower income expectations, the government estimates that 8-13 million might be under-saving, or planning to retire too soon.

Why are people apparently not saving? Emmerson suggested:

• that there is a great deal of misunderstanding about the system. People are simply not making the right decisions. But do they need more information? Simplification? Or do they simply need compulsion? • that many whom we believe to be under-saving may, in fact, be saving the “right” amount. It may just be that society doesn’t like the (rational) decision they have taken about saving.

If the latter is true on a significant scale, we need to rethink the incentives on offer. In general, however, the DWP’s Green Paper seems to take the first view – that people do under-save, largely because of misunderstanding. Hence, the Inland Revenue’s proposals for simplication, which tend to leave underlying incentives unchanged (except for the very rich).

But will the two papers actually change savings behaviour? Emmerson saw some reasons for optimism in the commitment to look at the working patterns of older people and at the intention to let those who can work longer. But “something has to give”. People will work longer anyway, he pointed out, because people are healthier and are better able to participate. Plus, he predicted, the combination of the shift from defined benefit (DB) to defined contribution (DC) pension schemes and lower investment returns will “induce later retirement”. Indeed, he suggested, the recent fall in participation rates among older workers could be a one-time shock that might not prevail into the future.

In conclusion, he made two predictions:

• that people will have to cope with a lower income in retirement, relative to the general population; and • that, on average, people will live longer and retire later.

As to whether they will save more, that is still “an open question”. C. Robert McDowell McDowell began by emphasising the need for a macroeconomic context to the debate about pensions. Soon, he said, UK pensioners will be “four times the population of Scotland or bigger than the population of Iraq”. Plus, he said, “pensions are a world issue”, in which ideology is important.

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Pensioners He dated the current controversy back to 1996, when the US Congressional Budget Office (“Republican-dominated”) claimed that, by the middle of the 21st century, the cost of pensions vote would bankrupt the US, doubling the Federal debt. This prompted a serious debate on cutting the US pension burden – without anyone providing a “credible reason” why pensions are such a burden. In his view, “pensioners are a beneficial part of the engine of the economy”. The state gets a huge “clawback” from the way pensioners spend their money (particularly because they have a low propensity to buy imported goods). “What is paid out in January is back in the exchequer by April.”

Nevertheless, the post–1996 debate in the US now conditions our own government – which tends to view pensions from the “macro-political” point of view, rather than the macroeconomic. “I don’t see where there would be a problem in doubling the state pension” over a few years, McDowell insisted. There is no particular economic burden involved. Plus, he said, the existence of a private pensions industry is no justification for the UK government “to spend less on state pensions than other countries”. Correctly, he pointed out that we only spend about half (as a percentage of GDP) compared with many other countries.

This is important since, in his opinion, the state pension involves issues of social equity and addresses the problem of pensioner poverty. In his view, the UK economy can “without a hiccup” afford a doubling of the state pension – which would address the problem posed by the 20-25% of pensioners who live in poverty. He acknowledged that this in broadly the same as the percentage of the general population living in poverty: but why should pensioners have a similar poverty ratio? Why shouldn’t they be better off? “The government could perfectly well do this.”

Instead, McDowell pointed to widespread cynicism over both private and state pensions, and to a growing “political risk” which threatens the state pension. This, he said, is dangerous for social cohesion, as well as being ethically and morally dubious. “Cultural and gender issues” are involved, since pension questions have a disproportionate impact on women and children.

What McDowell wants, he said, is for the government to take a look at the broader pensions issue, beyond simply trying to get administrative costs down (“how pathetic is this as a policy?”). We must look at the macroeconomic element, “in other European countries as well”. D. Kevin Wesbroom Simplification Wesbroom began with a brief nod to the Treasury/Inland Revenue tax note, which he said was “the most radical change in 80 years” – albeit spoiled by the “limp-wristed” response from the is crucial Department of Work & Pensions. The Revenue is proposing dramatic reform:

• In – tax relief on pensions, a lifetime limit, and a cap on annual contributions. • Out – the pensions alphabet soup, complexity, surplus tests, anomalies.

In the end, he said, “a pension is a pension is a pension” – and there should be just one regime for taxing pensions. As a result, it is important that the Treasury holds its nerve in “throwing simplification at the industry”.

What is in the proposals? Wesbroom emphasised the £1.4 million lifetime limit for tax-sheltered pensions saving. “We think it is unique.” This is obviously hard to work into a final salary pension scheme, but there is an admirable attempt to put final salary and money purchase

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schemes on the same basis. Essentially, he said, the proposed limit is equivalent to about 2/3 of the current earnings cap.

Wesbroom noted that there is a provision to register existing plans that are worth more than £1.4 million – but people will not be able to add to those without a tax liability. Plus, there will be a uniform regime in which the Revenue taxes income when it comes out of a pensions pot – not when it goes in. And there will be an annual contribution limit of £200,000 – which means that, in effect, for the vast majority, there will be no limits on what or when they save for retirement. As now, 25% of the value of the pension can be paid out tax-free at the time of retirement.

This is good. The new proposals are much simpler than what they are intended to replace – which means, he warned, that “lots of what actuaries now do will disappear”. Even though there are some anomalies, what the Revenue is offering is “potentially one regime for pensions”.

The new proposals also mean that people will be able to stay with the same employer after retirement age, and still draw some pension. This will pose a challenge to employers – how to change the dynamics of the workplace. This will inevitably be attractive to higher net worth individuals, who will be able to ease down to, say, a four day week. At the other end of the socio- economic scale, people may have no choice but to remain in some kind of work as long as they can. Whatever, it requires a change in philosophy.

Part of the change is also the proposal to raise the minimum retirement age from 50 to 55 by 2010. Overall, the theme is one of people working longer. Even the civil service will raise the retirement age from 60 to 65 for new entrants. This “seems sensible, given longevity”.

The whole intention is that there should be “more flexibility of pension shape”. This means that pensioners will be able to buy new products like money-back guaranteed annuities, or various new death benefit products.

But what will really change pension provision? Wesbroom pointed to the £1.4 million lifetime limit, and its impact on “fat cats and top dogs”. With a 60% tax rate on savings over £1.4 million, will that change their wider attitude to pensions – even for less well-remunerated employees? He worried that we might see the de-emphasis of pensions for senior executives – with a knock-on effect for overall corporate pension provision.

Wesbroom had one other concern. He said he was unconvinced that complexity has really been the key barrier to people saving at the bottom end of the market; there are other more important factors. In particular, companies need an incentive to keep going with corporate pension schemes – and that is something that the Treasury/Revenue paper simply doesn’t really address. E. Jim Cousins MP Get the Cousins began by emphasising that what he was giving was strictly a “personal point of view”, and that he was “in no sense, speaking for the government”. That said, he, too regretted that the computers government had chosen not to be represented at the conference to work... Cousins began with a “boring technical” point. If UK computer systems worked better and talked to each other, he pointed out, the scope for dealing with the pensions problem (particularly pensions taxation) would be enormously improved. In that sense, what the government is now proposing is, therefore, an interim solution, because computer systems are still not yet capable of

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networking or of dealing with such a huge volume of data. For instance, he said, Inland Revenue and social services computer systems don’t yet speak to each other.

The main problem with this interim proposal is that the minimum income guarantee and pensions guarantee are “only viable if most people don’t claim them”. If the take-up increases, these would rapidly become extraordinary expensive.

That said, he pointed out that the government’s top priority at the moment is to assist people at the bottom of the scale. This means that issues (like annuity reform) that don’t do much (or anything) for these people won’t get much support from the government at this time.

According to Cousins, it must be self-evident that the government “must support the existing base of occupational pension schemes”, as well as improve survivor benefits. He pointed to the case of a couple with reasonable income, who find, when one partner dies at 80 or more, that income falls sharply. Yes, there is help. But, at that age, people are hard-pressed to hack their way through the means-testing jungle to repair the financial damage. Reflecting this, he noted, single female owner-occupiers very often don’t even claim Council Tax benefits.

“I advocate 401K plus” plans, said Cousins. In his view, stakeholder pensions were lifted from US 401K plans, but without some of the key features (eg. the idea of using the pot of funds for other major lifetime events). A US 401K plan is still a lot more flexible than a stakeholder pension.

That said, Cousins also insisted that he supported a “substantial increase” in the basic rate of pensions – at least to the MIG level. This must be done immediately, and is far more important, say, than trying to peg pensions to income, not prices. F. Discussion

Ros Altmann began by noting the “complacency” of the DWP’s Green Paper – which argues, essentially, that there is no crisis and that the state system is affordable. In her view, to argue that we can go on spending 5-6% of GDP on pensions up to 2050, despite the increase in longevity is simply not believable. “People won’t stand for mass poverty.” It is “not politically believable” that we can go on ignoring the problems of an ageing population.

Plus, she pointed out, the Green Paper barely mentioned the state system at all. Unless this system is sorted out, said Altmann, people won’t know what they are building on. That said, there are some areas of agreement. In Altmann’s view, for instance, it makes sense to combine the first and second state pensions, and perhaps to say that everyone over 85 gets the MIG. But, with the current system of means testing, even that can act as a major disincentive to saving. It may be, she said, “rational not to save”.

It is, thus, all well and good to offer cheap and simple savings products. But we still may have to change the incentive structure so that people buy them. That may mean more incentives than simply a break on the basic tax rate. Should one give tax relief equivalent to higher rate tax? We have got to find a way to make it sensible for people to lock up money for a long time.

John Chown agreed with Wesbroom that the £1.4 million lifetime pension savings limit appears to be unique – though he emphasised that it is a limit on pensions, not on savings as such. That said, when you are near the £1.4 million limit, there will be a big disincentive to invest in equities – in that, if they actually rise, one may incur a tax liability at 60%. As for annuities, Chown

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suggested that the government itself should actually sell life annuities over the Post Office counter. (Fine, said McDowell. But try to find a Post Office.)

Alan Barton wondered about the impact of means testing. The very elderly are often asset-rich, in that they have no mortgage. But they often have very low levels of income. Means testing can be perverse, and can cause the elderly not to realise assets in that “if you live in a house, we don’t take it into account, but if you sell it, we do.”

Humphry Crum Ewing, responding to McDowell, suggested that there is a need for real data to see what a substantial increase in the state pension would do to the broader economy. What would the net figure really look like, given plausible assumptions about “clawback”? Do we even have the kit to give us an answer on questions like this?

Cousins (who had been sceptical about the ability of government computers to speak to each other) felt Crum Ewing’s calculation was possible, but complex – particularly given assumptions about take-up.

Webb reiterated that the priority must be to increase payments to the very elderly – but agreed that take up is an issue. Emmerson indicated that the commitment to a MIG will cost the government £5½ billion if there is 100% take up.

McDowell claimed that the Treasury operates under a blanket decision not to explain the difference between net and gross costs: “this is nonsense”. He pointed out that National Insurance contributions are not hypothecated to social security or pensions, and claimed that “some of these accounts are in surplus”, ie that they could be used to fund a good part of an increased state pension.

John Chapman offered two figures:

• First, from Oliver Wyman & Co, a new estimate of the annual savings gap, revised up from £27 billion to £35-40 billion/year. • Second, the fact that, at present, UK state pensions support is about 5% of GDP (compared with 10% on the Continent ) – plus a net £13 billion (or 1.5% of GDP) in support of private pensions.

The difference between what the UK provides in total pensions support and the average level of such provision in other EU states is about £35 billion – in other words, the savings gap is approximately the same as what the state is not delivering.

Peter Thompson pointed out that the proposed increase in the state pension – if it is combined with deferral of the pension until, say, 70 – ought to mean a more generous state pension from that age.

Francis Fernandes wondered whether the press focus on the £1.4 million lifetime limit, and the impact of the Revenue proposals on high earnings, is warranted. There is another impact that hasn’t been addressed. Why shouldn’t I, he wondered, save outside a pension until two or three years before retirement – and then decide whether or not to move this over to a pension (so that 25% can be taken out as a tax-free lump sum) or “blow it on a cruise”?

Chown criticised the failure of the Green Paper to say much about saving through other assets, eg. house purchase. As he noted, equity release loan rates are still outrageously high, and “downsizing” is made much more difficult by the high level of UK stamp duty.

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Des Le Grys followed up on this. Older people don’t want to move, he pointed out. They don’t want equity release either, because the house represents their lifeline of savings. They are “most reluctant to release it”. Plus, he agreed, “equity release is not good value for money”.

John Hough pointed to the instability of the savings regime. Surely, the aim ought to be to encourage a stable pensions regime over a prolonged period. McDowell agreed: pensions have become a political football in the UK. In Continental Europe on the other hand, there is much more stability; pensions are often an all-party consensus issue. “We need to catch up on that.”

Heléna Herklots, speaking on behalf of Age Concern, said that she welcomed the proposals on a basic pension and on the position of women. She was also supportive of the links between this and providers of informal care – but there is still more that the pension system can offer in this area.

Dave Tyson asked the key question: “Is my pension safe?” Given the billions that the Chancellor pulled out of pensions through his controversial tax measures, it is perfectly understandable that people are turning away from pensions.

Emmerson agreed with Chown and Le Grys that many individuals do have a lot of money tied up in their house – and much of that could be liberated if there were better-value products around. As for the possibility of deferring pensions contributions until nearer retirement, fine. Why not put money first into an ISA and then into a pension? Why not put it first into a house, and then What about into a pension? “The Green Paper gives flexibility.” compulsion? Webb took a fairly tough line on compulsion – arguing for a parallel with seatbelts. “We didn’t give people money to wear seatbelts” – wearing seatbelts was and is legally compulsory. As he put it, “incentives cost money”.

Patricia Lough appeared to agree. If workers realise that the state is pulling out of pensions provision, workers will simply demand more wages. “Compulsion is honest, up-front and clear.”

Wesbroom suggested that the Green Paper “smells of fear”. The government knows there will be losers; it knows we haven’t got enough money to meet all our obligations. But it still backs off on specific issues. For instance, it still doesn’t tackle the issue of pension fund distribution when a company goes bust.

That said, it does offer greater flexibility – and makes it possible for people to “catch up”. As a result, insurance companies are already working on pension/ISA products. This is not bad – but he agreed that the 401K concept may be more sensible.

McDowell suggested that we need to think more about how property fits into the pensions mix. Why do we think that pensions are somehow “better” than property? The self-employed sector generally has grossly inadequate pension provision; we need to think about “other stuff”, like property, that it does have.

Cousins was sceptical about anyone who was looking to property for long-term income: “I am praying for you.” That said, he agreed that we need to redesign the pensions vehicle so that it looks more like a US 401K account: “That is better than compulsion.”

Cousins also made the valid point that, if savers are compelled to put money into some sort of market vehicle that can (and does) go down, we may end up with a huge pensions mis-selling

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scandal. “People will demand their money back.” What we need is more flexible longer-term savings vehicles.

As for the locked-up value of housing, he suggested that it is a “southeast phenomenon”. North of Chesterfield, it doesn’t work.

Fine, said McDonald. But don’t forget that the US 401K system is built on the US Social Security system – and that is “much better than our own”. 3. Session two: What is the consumer interest?

Once again chairing the session, McDonald began by introducing the panellists:

• Mick McAteer, from the Consumers’ Association; and • Paul Smee, director-general of the Association of Independent Financial Advisers. A. Mick McAteer

McAteer began by saying that, in his view, there are really four “stakeholders” in the pensions debate:

• the state itself; • employers; • employees (and their representatives); and • the broader consumer interest.

That said, he stressed that all pensions are essentially paid out of the taxes and contributions made by employers and individuals. It is, therefore, crucial to have a consumer perspective. Pensions are a public policy challenge, and they are not easily susceptible to a market solution. In that sense, he said, “we need to look at pensions as we do at, say, education or transport”.

The fundamental pensions problem is that we are not providing enough money for the mass of ordinary people. The state pension is falling in real terms, employers are cutting their contributions, and individuals are not saving enough (indeed, he said, 46% didn’t save anything last year). For the moment, the government has ruled out compulsion (which he said was a “mistake”), which leaves us with voluntarism – and all the problems that brings of additional expense, the need for incentives and awareness. For McAteer, “the case for compulsion is unanswerable” – but the government has rejected it.

Where does that leave us? McAteer pointed to the “sheer fragmentation and complexity” of the UK pensions system. In his experience, there are 13 types of personal and employment pension, and five or six types of government pension. The system “needs radical simplification”.

Plus, there has to be concern that, as the state withdraws from the pensions arena, there will be a transfer of risk from the state and the company to the individual – forcing him more and more to become dependent on the capital markets. In McAteer’s view, this transfer is “ill-judged”, not least because a suitable advice structure and process doesn’t exist. There is a serious problem

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of financial literacy in the UK – indeed, over 40% are “financially illiterate”, and one cannot expect them to engage with the investment industry.

Nevertheless, for too many people, retirement income has become a gamble on the stock market – with dangerous results. He pointed out that someone who retired in 2000 may well have been able to buy himself twice the retirement income of someone who retired in 2002: “equity markets throw people to the wolves.” As a result, McAteer said, what we need are new schemes that spread the pensions burden across generations.

In the end, McAteer warned, the net effect of all the government initiatives now underway may well be to reduce individuals’ access to unbiased advice – and that worried him. In particular, he opposed government suggestions that stakeholder pensions should be sold without advice: that is a “false economy”, he insisted. The danger is that, if this happens, confidence and trust will be adversely affected; people won’t trust the state system, they won’t trust equity markets, and they won’t trust final salary pension schemes either.

Clearly, the confidence of the consumer is crucial. At the moment, the consumer is well aware that the pensions system is in crisis – but he doesn’t have a clue how much he is supposed to save to compensate for that. As noted, 46% don’t save at all – but somehow, everyone expects to be able to retire at 58 on a two-thirds final salary pension.

As for the Green Paper, McAteer said he had hoped it would be more radical. In his view, the government made a mistake by not seizing the opportunity for more radical reform. B. Paul Smee Smee began by pointing out that there are now 18 consultation documents on the independent financial advice sector – and two more are due in the next few weeks. If there is a pensions crisis, he insisted, “we need to focus our resources”. Instead, the financial services industry is hampered in its efforts to address the problem by “too many agendas”.

Obviously, Smee acknowledged, the IFAs also have their own agenda, and “I will play up the role Advice is of advice”. But, he insisted, financial advice does need to be available to all, or “early retirement crucial... on full pension will be a forlorn aspiration”.

In the last few years, said Smee, the role of advice has been downplayed. Many people even “thought the public could do it over the Internet”. We cannot; we need intermediaries to help consumers focus on the real issues.

Smee was fairly realistic. Although he deplored the 1% commission cap, he accepted that the industry would not go back to “the good old days”. He acknowledged that there was too much fat in the system then. However, the 1% is arbitrary and cannot provide for adequate distribution. We have got to accept that, in the consumer’s own interest, advice is important and should not be eliminated.

As for whether there actually is a “crisis”, Smee wondered what we would be saying if the FTSE- 100 were 1,500 points higher. In his opinion, there probably still would be an issue of funding occupational schemes – but it wouldn’t be a crisis. “The problem is the number of chips on the equity part of the table” – which strongly suggests that a more diversified asset allocation is required.

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Should property be part of this? For many people, he said, it is a “get-out-of-jail card” – but lots of people don’t want to move to Burnley. Whatever, a balanced portfolio “won’t happen without advice”.

What is the way forward? Employers are retreating, company schemes are closing. It is important that corporates shouldn’t leave the field entirely. We need a more imaginative approach: perhaps employers should ensure that workers get financial advice. At the moment he said, it is just too easy for employers to set up a stakeholder scheme for employees in name only. We need a genuine partnership here involving the IFAs, employers and the financial service regulator. There is an obvious problem of the regulatory hoops that mass advice has to go through so that the adviser doesn’t leave himself vulnerable to legal action.

What options are there? Smee suggested “focused advice”, in which the adviser is able to answer questions asked in a cost-effective way. Plus, he asked, couldn’t there be tax breaks for employers who make advice available in the workplace?

Whatever, the only way that we will get action is if a consistent message is given by government – and, at the moment, that is still not happening.

Smee suggested that there may well be a case for making financial advice more freely available through bodies like the Citizens Advice Bureaux or through some sort of national initiative. He pointed out how much easier it is now for an individual to take out a (potentially crippling) loan than it is for him to buy an investment product for his old age.

As for the government’s specific initiatives, Smee (like others) felt that the Inland Revenue was to be congratulated on its paper – “but that, by itself, won’t encourage people to save”. Plus, he worried (like others) that, if there is a lifetime cap, people will delay putting money into pensions until they have a higher income. In his view, that is “the wrong sort of message”. C. Oonagh McDonald The McDonald herself is leading the fight for reform of annuities legislation. annuities She began by supporting the general drift of the Revenue’s taxation paper, though – while there is issue is an effort to avoid the word “annuity” – the fact is that pensioners will still be required to take a mess benefits promised to be paid for the duration of the member’s life at the age of 75. Nevertheless, she acknowledged that, so far, the government’s proposals “look good”. And, indeed, she admitted that people with relatively small investment funds might still be advised to take out annuities.

What she continues to insist on is more choice. At the moment, she said, 80% of annuities that are purchased are level payment annuities that may well not be a sensible option. Unfortunately, life offices like to sell them because they like to get rid of the inflation risk. This means that, for a 65 year-old man who lives to be 85, the real value of an annuity’s purchasing power will drop by 50% if average inflation is 3% a year over a period of 20 years. In contrast, she noted, the MIG and pensions credit will go up with inflation.

The government sets great store by limited period annuities, but McDonald warned that there is a real risk of churning. Moreover, they dispose of mortality risk – an advantage for the life offices but not for individual purchasers. In her view, people are reluctant to buy index-linked annuities because they start at a lower level of annual income than level annuities, and people tend to

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underestimate the length of time they will live. If fully indexed annuities continue to appear to be an unattractive offer, then perhaps they could be structured differently. She noted that some Continental annuity products actually increase in 3-5% steps every few years. There is a lot to learn from other approaches.

Like others, McDonald emphasised the issue of sex discrimination when it comes to annuity provision. She pointed out;

• that men’s life expectancy from the age of 60 is increasing significantly faster than that of women; • that, “cohort by cohort”, 86% of men and women die at the same age – it is just that 14% of women live much longer; and • that someone’s postcode is a much better predictor of longevity than sex.

Under these circumstances, it is very hard to understand why there is discrimination in the provision of pensions on the basis of sex. In the Barber case of 1990, the ECJ defined pensions as “deferred pay”. Given that pay is governed by equal pay legislation, following this judgement, all final salary/defined benefit schemes in both the public or the private sector, are sex-neutral. But the same does not apply to all defined contribution pensions schemes, nor to annuity purchase. Women MPs and civil servants do not face discrimination in pensions, but they do seem prepared to tolerate sex discrimination in private schemes, which leaves them politically isolated. Unless steps are taken, McDonald warned, “women will face discrimination in private pension schemes”.

In her opinion, this is bound to produce a backlash. When women realise that, for the same investment pot, they will get less back, “they will not save”. This issue, she warned, is not addressed in the Green Paper, but it is very important for the majority of consumers. D. Discussion

Alex Field began by questioning Smee’s scepticism that financial advice could be given on a serious scale over the Internet. Dow Carter builds websites and, he said, one can make a case that website-based advice avoids a lot of the obvious obfuscation (particularly on costs) that one finds in IFA literature.

Alan Waton pointed out that “Europe is the ghost at the feast”. He agreed that there were logical inconsistencies in the Barber judgement, but he felt certain that Europe would have a bigger and bigger say. In particular, given the attention now being paid to the cross-border portability of pensions, “can we really assume that lump sums won’t be taxed in the future?”.

McDowell argued for simplicity: the best idea would be a single pensions/life product. “Why aren’t there any state life policies?” he wondered. Combined life and pension products would treat women more fairly.

Altmann raised a different concern. In her view, “we are trying to make pensions last too long”. The original concept of a pension was not designed to last more than 10 years; now, many people will be in pension for 30 years or more. Originally, we were expected to work for at least two-thirds of our life; now, it is probably half – and it will soon be just 40%. This obviously makes pensions more expensive – and it means they must be more flexible. In particular, we have got to accommodate part-time working.

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In addition, she said, people need more help. “Financial planning is not just what product to buy.”

Turning to the Green Paper, Altmann suggested that one of its shortcomings is that it assumes that stakeholder pensions are a success. In truth, “the 1% world doesn’t work”. In her view, it is not good enough simply to say that advice is too expensive; we have got to find ways of making advice cheaper. She suggested running personal pensions through pools – affinity groups based, say, on region or age. The idea would be to get more buying power for the individual investor so that individual money purchase schemes are better value. DB/final Robert Laslett picked up on the final point – emphasising “the receding tide of defined benefit/ salary final salary schemes”, which in his view, amounts to a reduction in “implicit compulsion”. He schemes wondered whether individual advice can ever be offered profitably. in retreat Lough pointed out that all pension plans – and not just money purchase schemes – have been rubbished. Even many final salary schemes are bad value if you change jobs. There is a total lack of confidence in the entire pensions system: “the government doesn’t understand that people think pensions are bad things”. That said, she herself professed to be shocked that the sense of the meeting seemed to be that stakeholder pensions should be more like 401K schemes. Surely, she pointed out, the government had long enough to design the product it wanted.

On the issue of compulsion, Lough said “I used to be in favour”. But “if it is made compulsory, it will have to be attractive”. If the public is resistant, the political fall-out would be very negative.

Bryan King noted that, although “there is lots of financial advice out there”, there is very little financial education. People still don’t understand personal finance. His own firm, he said, had devised a website that encourages people to “learn about money”. If we are to solve the pensions problem, people have to understand more; they have got to understand why saving is necessary.

John Chapman suggested that the existing distribution system is part of the problem. Unfortunately, there is a stand-off between the industry and government on this. In his view, “the 1% has to be raised” – but, even if it is raised, he remained unconvinced that IFAs will ever really sell to lower income groups. Clearly, as Sandler suggests, trackers are the best bet for most, but it is very hard to take out the intermediaries.

Referring back to the issue of compulsion, Pauline Wood noted that Accenture has just completed a survey which suggests that “compulsion is actually popular”. According to her, people say “just tell me” – and they seem to believe that compulsion would give them a safety net.

Defending the role of the intermediaries, Smee suggested that the main role of websites is that of information collection. “We will still need intermediaries” before people do anything. However, he raised another problem – the apparent indifference of the European Commission toward the whole issue of pensions. “Where does the question of pensions fit into the FSAP?”, he wondered.

On other issues that had been raised during the discussion, Smee had several points to make:

• Are pensions too inflexible for today’s lifestyles? Of course; people’s attitudes also change, and lifestyles change. People will require changes in products over the duration of their retirement.

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• Compulsion: In his view, “the debate on compulsion is some years away”. The problem is the liability that the government would then take on if things go wrong. • Consumer education: “Yes, it must happen” – but it must also happen early, because financial education is complex and “deadly boring”. • Commission-based selling: There are, as Chapman suggested, problems with the commission– driven sales model. But what is the alternative?

McAteer felt that the combination of technology and education may have some potential. Unfortunately, seven million adults only have the literacy standards expected of 11-year olds. And “half of the population doesn’t know what 50% means”. Plus, technology is only going to be really effective in the hands of trained intermediaries. In that sense, he said, the UK is very different from the US – and that makes it dangerous to rely too much on education. It is no substitute for proper policy-making.

The scale of the problem is so daunting we need all the help we can get. Over six million families in the UK are having trouble repaying their debts, and 1¼ million are in “serious financial difficulty”.

As for Europe, he felt the UK was at a “defining moment”. Do we belong, he wondered, to the “European social solidarity model” or do we belong to the US model? (Though he also pointed out that the US Social Security system is better than anything we have in the UK.) In McAteer’s view, “the way we are going is fundamentally flawed”. The Consumers’ Association would like to see the government create a new state pension scheme based on the US Federal thrift scheme, with huge economies of scale. Instead, we have a system here that is inherently expensive. After all, as he pointed out, while there are only 800 shares in the FTSE all-share index, “there are 2,000 funds chasing them”. It is, therefore, “not surprising that they cannot live in a 1% world”.

In his opinion, the present UK reliance on private sector pension provision is misguided and risky. 4. Luncheon speaker – Frank Field MP

Field began by admitting that his position on pensions has changed in the last year. The reason is the imminence of crisis. As he put it, “pensions barons” are like European royal families pre- 1914; they have no idea what is about to be unleashed.

The issue is now political. In Field’s view:

• many people will see pensions promises “snatched and devalued very significantly”; and • it will be extremely difficult for the government to negotiate a reduction in pension obligations precisely because our pensions promises are now delivered through so many corporate, public and private schemes.

He pointed out that, essentially, Germany has one scheme, whereas we have 60,000, some of which are closed and many of which will close to new members over the next five years. The increasing pace of corporate pension scheme closures obviously worried Field. It stems from two things:

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• Some pension schemes are now more valuable than their parent company. • Many schemes have such a large funding gap that, if the sponsoring company were honest Corporates and tried to make good the gap, there would be no dividends for the foreseeable future. But have a will they be honest? “Pension schemes themselves depend on dividends.” ratings This latter point is a problem. But Field was clear: it is inevitable that companies with pension problem funds that are in deficit will see their credit ratings cut – which produces a “pincer movement” on parent companies since they will see their ability to borrow in the markets curtailed. What, under these circumstances, will boards do – particularly in manufacturing, where companies are already under pressure from sterling’s overvaluation and competition from low wage economies?

The result, he said, will be a “new era of pension politics”, in which the government will not be able to avoid the problem.

Another factor: When Labour won in 1997, only 40% of eligible voters were over 45 – but 60% of those who voted were over 45. At the next election, 40% of eligible voters will be over 55 – which suggests that security of pension provision will be a huge issue with a strong bearing on the outcome. Field put forward three proposals:

• “I have a pensions wind-up scheme bill” which is trying to get Tory support. He said he had written to Duncan Smith to ask for a “supply day” from the Tories to bring it to a vote. This would tackle the difficult issue of how to wind up a pension fund – and it would permit assets to be distributed on the basis of years of contribution, not simply whether one is or is not a retiree. This would be a lot fairer. • Field also proposes improving where pension obligations come in the pecking order if there is some kind of liquidation. As he put it, “banks don’t like this”, because they currently have a preferred status – which gives them “an incentive to pull the plug first”. (Field also proposed a national scheme of insurance paid for by employees. Unfortunately, some of the closures in the next two years will be so large that the insurance scheme “will have to have borrowing power from the Treasury”.) • The government will also have to work on longer-term reform: “I want a funded scheme to run alongside the national insurance pension, paying 25 per cent of average earnings” – a sum which could then be deducted from company schemes.

In the meantime, however, Field warned that firms will wind pension schemes up so that they don’t go bust – and that means reform of winding up procedures, as well as rapid introduction of an insurance scheme, which he insisted must be funded by a levy on workers, not on companies. A. Discussion

Crum Ewing deplored the failure of government or the key departments to make anyone available to speak at the conference. “Is there anything you can do to get real consultation?”

Field agreed that it is important for government figures to come to meetings like this, “to have their ideas challenged”. It is “not just a loss for us; it is a loss for them”. That said, their absence makes it necessary to summarise the main themes that come out of the conference – quickly.

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5. Session three: Can the financial services industry deliver a pensions solution?

Piers Currie, who chaired this session, began by introducing the panel members:

• Graham Bishop, formerly the European bond market expert of Salomon Smith Barney; • John Chown, a leading international tax expert; • Dawid Konotey-Ahulu, with Merrill Lynch; • Barry Riley, now a columnist with the Financial Times; and • Ned Cazalet, an independent analyst focussed on the insurance sector.

He then observed (quoting Roger Bootle) that “people only want capitalism on the way up”. It is less popular at times like this. A. Graham Bishop

Bishop began by noting that he heard “echoes of money illusion floating around”. As he pointed out, for the people who built the National Liberal Club (where the conference was held), the main financial asset was 2½% consols. In the nineteenth century, he said, “average inflation was zero” and the average consol yield was 3½%. “We could be back in this world.”

As for the pensions crisis (and Bishop was sure it is already a crisis), can we provide a solution? Yes, he said – “if we put enough money in”. In his view, most defined benefit schemes are closed or closing, so pension fund liabilities look more and more like a bond yield.

Nevertheless, he pointed out, defined benefit pension schemes are still invested 80% in equities. If they try to move out of equities on any scale, these funds are so big (£600 billion) that there simply won’t be enough suitable fixed income securities to go round – especially long-dated (20- 30 years) securities. This means that bond yields will fall still further – and pension funds will then have to sell even more equities, and try to pile even more into bonds. “We are already well into this vicious circle.”

Is there a solution? One possibility is that government borrowing may rise sharply – increasing the supply of gilts. Another is that pension funds may make more use of the corporate bond market – though that carries the risk that the corporate bond market is closely tied to the equity market. Could we use mortgage–backed securities (as in the US)? Could we, as he put it, have “grandparents funding the house purchases of grandchildren”?

Whatever, he warned, “we cannot have weak equity markets without consequences” – and they will be bad consequences. B. John Chown

Chown began by pointing out that the French are due to bring out new proposals on social security “next month” (ie in April). He then noted that the pensions crisis has moved from “page 8 of the Financial Times to page 1 of the Daily Mirror”.

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Turning to the underlying demographic problem, Chown pointed out the obvious: “if you want to maintain the work/life balance, you will have to work longer”. But there is another problem: he noted that, since 1965, the “disability-free lifespan” for men has been broadly constant, but has actually fallen slightly for women. The evidence suggests that it is a toss-up whether medical advances have prolonged active life or have prolonged life with disabilities – with all the costs that this brings.

Typically, he noted, the average age of retirement “is 58 – not 63, or 65, or 68”. Partly, this is because disability tends to cut a couple of years off the retirement age, but also employers wanted a way to offload older workers – which means there was an “unholy alliance” in favour of early retirement. If we are going to change this, we have to look at the overall effect of taxation, social security etc in terms of incentive effects. As he pointed out, it is not just a question of whether one is or is not an invalid; if the tax regime incentivizes you to be an invalid, then the temptation is that you will be an invalid.

According to Chown, the UK has been living in a “fool’s paradise” when it comes to pensions – with everyone implicitly assuming unsustainable returns from equity. After 1997, Brown “collected a lot of money from pension funds” – but no one noticed because pensions are somehow “down the line”. Now, with equities in a slump, this has started to hit sooner than people had expected. The fall in UK equity markets has highlighted the cost of market intermediation – but it has also exposed the impact of what Brown did in 1997.

What are the alternatives? Chown pointed out how difficult it is for the individual investor to buy gilts (though Con Keating suggested that they can still be bought through the Post Office). The point is that, for the individual, there are very few acceptable alternatives to equities. C. Dawid Konotey-Ahulu

Konotey-Ahulu began by saying that he was bringing a “banking risk-management perspective” to the discussion.

In his view, the current crisis of defined benefit schemes in the UK and Europe carries “the hallmark of a perfect storm”. It is the confluence of a number of very particular circumstances. As he pointed out, asset values have been deteriorating significantly over the last year – especially equities. At the same time, pension fund liabilities are rising on a discounted basis, because of significant falls in interest rates. Accounting standards are also becoming more and more rigorous. The overall result is that when equity analysts look at a company, they are increasingly taking a long hard look at the status of its pension fund. Last week, he said, a large German steelmaker was downgraded on concerns over its under-funded pension liabilities, and several other corporates were put on credit watch.

FRS 17/IAS 19 will raise the reporting bar, and in the end will probably ensure that movements in pension fund deficits are reflected in the corporate’s P&L account.

Konotey-Ahulu predicted that, as European governments try to ensure that pensioners get what they were promised, they will try to improve the status of pension fund beneficiaries relative to that of other creditors. This, he predicted, “will be negative for bondholders and other creditors and is a worrying development for corporate senior management”.

What is the message? In his opinion, it no longer matters how assets have performed relative to some other pension fund or benchmark. The only relevant issue now is how the fund has

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performed relative to its own liabilities. That will be the critical factor in deciding whether a company retains its credit status – and it will impact its cost of borrowing.

Corporates Is there a solution? In Konotey-Ahulu’s opinion, pension scheme liabilities are now the benchmark, and it is, therefore, crucial that sponsoring corporates and scheme trustees understand better must how assets and liabilities are affected by the two primary risk drivers - interest rates and inflation. manage The time horizon over which asset/liability performance is measured has effectively been their shortened, and you cannot afford to wait for several years for favourable market conditions to return. After all, as he pointed out (quoting Keynes), “markets can remain irrational longer than pension you can remain solvent”. Now, it is imperative to know just how sensitive pension fund liabilities funds are to changes in inflation and interest rates. In a world of low interest rates and rising inflation (which is, after all, what is happening in Ireland and Spain), pension schemes (and their sponsoring better corporates) can experience very large losses on a mark-to-market basis. If the UK does join the eurozone the same phenomenon may well be experienced here: pension scheme liabilities will rise significantly on a discounted basis as interest rates fall and inflation rises. Can one hedge this?

He suggested that it is very important to understand the particular characteristics of each individual pension fund – and then to tailor a hedge that will strip out interest rate and inflation risk. However, he warned, the market for hedges like this is not very deep, so it is important that one moves fast to implement a hedging strategy. It is important for companies to position themselves according to their risk parameters: “you are not trying to beat the FTSE; you are trying to beat your liabilities.”

In summary, he said, a pension scheme should ask itself:

• Do we fully understand the sensitivities of both the assets and the liabilities to market movements? • Do we have a risk management strategy which allows us to identify, quantify and eliminate unwanted risk? • Do we have a clear and efficient strategy for funding any deficit over a precise period? • Do we have an execution strategy for achieving the above? D. Barry Riley

Riley began by wondering whether the financial services industry can deliver a solution to the problems that have been identified. As he put it, “the pensions industry wants short-term solutions to a long-term problem”, and there is a temptation to rely too much on the extrapolation of recent trends. He noted that, just as huge amounts of pension fund cash from baby-boomers triggered the equity bubble of the 1990s, so the same kind of bubble might well be starting in the government bond area.

“We need more sophisticated analysis of what we can really expect from an investment.” The government simply exhorts us to “save” – but in fact its responsibility goes well beyond that. Clearly, it has a responsibility to pensioners, but it may also have a responsibility for sustaining the profitability of the corporate sector given the impact that can have on pensions. In this context, Riley was very concerned by the impact that the £4 billion/year increase in NI contributions is likely to have on pensions. He also noted an obvious conflict of interest that undermines the Treasury’s position: on the one hand, low long-term bond yields are good for the taxpayer – but they can be devastating for these who buy annuities (and hence can affect the ability of the elderly to make adequate provision for themselves).

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Riley noted the constraints under which pension funds have to operate. It is a world of rapid ageing and a shrinking work force – one in which it is increasingly difficult to see investments in domestic equities (or bonds) paying off as they have in the past. What options are there? He suggested overseas investment, but then emphasised the political risk, especially in emerging markets. But there is the potential for a backlash: in a world of much lower returns, “can we expect poorer citizens to go on paying the pensions of richer ones”, as they often do now?

As for housing, Riley pointed out that it is “Britain’s best-performing asset class” – but residential housing hardly figures at all in the portfolios of pension funds. Housing has performed well, largely because of the shortage of supply; some 70% of voters are homeowners, and they are well aware of the political control they have over the planning system.

Riley also pointed out that, in contrast, pension funds have no control over the supply of equities or bonds in which they invest; that is entirely outside their control. They are also essentially national, despite the fact that most big companies are now global. This emphasises the general point that the financial services sector has to find a way of matching pension fund assets and liabilities over the longer term. As others have pointed out, there is not yet an adequate supply of long-term bonds, which is going to make it hard to match liabilities. Nevertheless, he said, this has to be the big challenge for the investment industry. E. Ned Cazalet

In Cazalet’s view, the financial services industry by itself cannot solve the pensions crisis. What it needs is a revolution in confidence – perhaps a belief that “the past will regenerate itself”. But will it? Are we really too pessimistic?

Cazalet pointed out that when Bismarck introduced 65 as the normal retirement age, those who Don’t retired had on average just two years to live. Now, a retiree at 65 is likely to live to be 85 – and people increasingly want to retire at 55. This raises some very fundamental questions – including overestimate what really is retirement? And when do we want it to start? the probability Cazalet referred to the recent research by Dimson, Staunton and Marsh, which looks at 101 years of global investment returns – and which has undermined many of the comfortable assumptions of an we have cherished.1 In particular, he said, their work shows that it was only about 50 years ago equity bounce (post–World War II, with a young and fast-growing population) that equities started to outperform other assets. Thanks to George Ross-Goobey in the UK, people piled more and more into “the equity bet”, and new products and institutions emerged. But this is all a relatively recent phenomenon – and it may well change as the population ages. He noted that the average age of someone in the UK is now close to 40, and that the proportion aged 55 and over will grow 50% over the next 50 years.

As a result, the unrealistic overoptimism of the dotcom bubble cannot last: “the past is no reference guide for the future”. In his view, pension funds are too stuffed with equities – particularly when the funds are actually guaranteeing benefits. Bismarck’s original vision was “work and die”; now, people want 20-25 years of retirement – some of it with very expensive impaired life. “The numbers just don’t stack up.”

1 “Triumph of the optimists: 101 years of global investment returns” Elroy Dimson, Paul Marsh and Mike Staunton, Princeton University Press, 2002.

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Nor do the solutions. For the life industry, he said, the solution is simply to save more to close the savings gap. But how much is the savings gap? £27 billion? Or £40 billion? Or £66 billion – which he said is the latest estimate? Whatever, there seems to be a consensus that the “average punter” should save another £2,500 a year – “but they don’t have it”. People won’t save what they don’t have. It is often pointed out that “£27 billion is what we spent on booze and fags last Social year” – or that it is equivalent to another 10p on income tax. Either way, the deflationary impact, attitudes if we were to increase savings in this way, would be enormous. As he put is: the Japanese are savings-mad - “and look at their economy”. to retirement Maybe the answer is to redefine what we mean by retirement. must The old-age dependency ratio (the ratio of those in work to retirees) is about 30%. In twenty change years, “it will rocket” – creating a huge government problem. We must encourage people to stay in work until 70 or 75, and that means that social attitudes will have to change.

On this score, the government isn’t really helping. As Cazalet pointed out, the real problem is not to help the guy who earns £200,000 or more; it is to make sure that the person earning £15,000 has a pension. Amongst other things, that requires a rethinking of the link with benefits and taxation: “it is crazy to say people should save, and then penalise them through the benefits system”.

In general, Cazalet suggested, there has been a change in asset class behaviour. Equities, for instance, have become much more volatile, and the premium versus bond returns has been falling. Maybe equities can no longer be counted on to outperform bonds, even in the longer term – which could have enormous implications.

For Cazalet, the government needs to be more considered in its responses to the pensions crisis – but it is not just government. As he put it, “if you were a corporate, you would wish you didn’t have a corporate pension scheme”. He pointed out that Gordon Brown has already said that he will “guarantee” pensioners a decent retirement – and many people find that assurance enough. But people are living longer and longer, and there just isn’t enough new thinking. Maybe it should be the ABI and NAPF who try to drive the debate by talking “authoritatively” to government on what longer-term changes are really necessary. F. Discussion Altmann began by suggesting that the real problem of UK pensions is not the Chancellor’s £5 billion tax raid or the falling value of equities. It is that the schemes themselves are too expensive – particularly in comparison with the US. Plus, pension fund liabilities are rising exponentially as people retire earlier and live longer – which really “shouldn’t have been a surprise”.

She took a tough line on renegotiating benefits. If the pension funds had been banks, lending companies money, would there have been the kinds of reschedulings that are now being proposed? In her view, all the firms who raided their pension fund surpluses should get together to replenish them now that they are in deficit. In principle, she agreed with greater diversification out of equities into bonds – but she emphasised the difficulty of finding matching long-term assets. Perhaps the answer is to use pension funds to finance long-term infrastructure projects.

John Hough suggested that we look at pension funds with the wrong tools. We are, he said, obsessed with the idea that a small change in interest rates can result in a huge change in the

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surplus or deficit of a fund – as calculated by the actuaries. What we should be looking at instead is cash in/cash out, which is markedly less volatile.

John Ginarlis wondered whether we are right, essentially, to assume that the global macroeconomy remains unchanged. There has, he said, been a massive fiscal loosening in the US and UK over the last 18 months, which has been largely unprecedented. Historically, he said, the preconditions for a sharp increase in inflation are now in place.

Riley responded to Altmann’s idea of using pension funds for infrastructure. Toll roads, he suggested, might work, if they are effectively a monopoly. As for the supply of bonds, he agreed that it has fallen sharply; but the emergence of huge government deficits could mean the supply will increase again.

That said, he highlighted the unfairness of the current situation: people who retired last year in the UK, and bought an annuity, faced extraordinarily low annuity rates – making them much poorer in their old age than people who had retired just a couple of years before.

Cazalet suggested that UK pension funds might be forced to turn to the sterling corporate bond market, which has grown twenty-fold in the last 13 years. It is now more efficient to issue debt than equity, he said, and there is a steadily widening pool of what he called “bond-type” investments.

Chapman made a good point: “Where is the pensions industry?” It was very largely unrepresented at the conference – despite how crucially it will be affected by the shift to defined contribution plans. What does the industry think about the future of equities? Is it planning for the shift into bonds that many observers expect? And, if so, what products might the financial services industry develop? He noted that the government appears to be considering a 60% equity limit for pension funds. If so, that would be a huge change – but, so far, “no one has developed any ideas”.

Currie agreed. The problem is that the government and the fund management industry do not have the same view. He also suggested that a major problem is the lack of a “BACS-type system” to gather up and consolidate small-ticket transactions.

Bishop was concerned that the industry might get the move into bonds just as wrong as it did with equities. The “worst possible outcome” for the pensions industry would be for it to shift to fixed rate instruments – and then have the government go to higher inflation (for which there is considerable precedent). He was also a bit sceptical about tying pension funds to long-term infrastructure. How do you set the return on toll bridges, he wondered? This is a regulatory issue, and if the regulatory rules are changed, the impact on pension funds could be severe.

As for greater use of corporate bonds, yes, the volume has increased. But most are short-term, and there is still an issue about concentrating risk (as he put it, “UK plc investing in UK plc”).

Konotey-Ahulu insisted that “the industry can address the problem” – provided the assets are there. His concern was that, whatever we in the UK do, Continental Europe has a massive exposure and hasn’t even begun to address it.

Another participant reminded the group that, earlier, it had been suggested that the government might set up a life company, and sell annuities over the counter. Is that really a direction we should be endorsing? Surely, the financial services sector could get together and come up with

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new products that are not so dependent on equities. On that score, Chown suggested that what we need is “a broader maturity of indexed gilts – because government has the power to create inflation”. 6. Session four: The death of occupational pensions – exaggerated or realistic?

Chairing this session, Michael Pomery began by emphasising the serious problems that the financial services industry faces in the form of rising costs and falling returns. In particular, he emphasised:

• the fact that increased longevity “has speeded up” (the increase in lifespan has accelerated); and • the fall in interest rates, which has had a huge impact on the cost of pensions.

He noted that rising costs tended to be hidden in the 1990s by booming equity markets. But now equity markets are falling – which means, at best, an end to contribution holidays and, more realistically, extra payments to make up pension fund deficits. That said, he pointed out that, by definition, pensions are a long-term liability – and, therefore, deficits can be made up over five, 10 or 15 years. But this does mean that, in the short term, scheme members have to rely on the goodwill of employers. And, in the case of smaller, less profitable companies, that may be very uncomfortable.

As a result, he said, even if there is no pensions “crisis”, there is certainly “a jolly serious problem”.

He then introduced the panel members:

• John Ralfe, the former head of corporate finance at Boots; • Michael Karagianis, of Aberdeen Asset Management; • Christine Farnish, director-general of the NAPF; and • Stephanie Hawthorne, of Pensions World. A. John Ralfe

Ralfe (who is opening his own pensions consultancy) began by pointing out that, just over a year ago, Boots had announced that it had moved its entire pensions fund into long-term matching bonds, rejecting equities altogether. In that sense, Boots “challenged the cult of the equity”.

In Ralfe’s view, matching pension assets and liabilities with bonds is “standard textbook stuff”. In his opinion, final salary obligations “are part of the company and should be managed as part of the company”.

Whatever the reasons for Boots’s action, Ralfe pointed out that what the company did helped cut the tax charge, reduced agency costs and reduced off-balance sheet risk. As he put it, last year, Boots had a £300 million share buy-back programme; if it had not been for the changes in its pension fund, this would not have been acceptable to the raters.

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Death of There are two benefits from this. In the first place, 70,000 Boots pensioners are no longer dependent on equities. In the second place, fees have been slashed. Ralfe noted that what he the had done had “highlighted the huge money made by advisers” in terms of fees and spreads. The equity cost of running the pension fund, he said, had fallen from £10 million a year to just £300,000. Plus, cult? by selling when the FTSE-100 was at around 6,000, Boots had locked in a surplus and fixed its future contributions – though he emphasised that this was “not about outguessing the market”.

Ralfe emphasised that what he had done was to implement a “strong” version of his own strategy. There is also a “weak” version, which says merely that the split of equities and bonds in a pension fund portfolio cannot remain unchanged for long periods of time – and it may not be appropriate to all companies. Indeed, he said, the appropriate split must depend, inter alia, on:

• the age of the fund (ie the ratio of pensioners to contributors); • the size of the fund compared to the size of the sponsoring company; • the creditworthiness of the sponsoring firm; and • the solvency of the fund.

This seems obvious. But, he said, there are many examples of small, mature funds with an equity weighting of 70% or more. In his view, “holding equities to pay members is a straight bet” – and he expressed surprise that actuaries, trustees and regulators allow it.

Obviously, as long as the FTSE was rising, it was easy to ignore even the “weak” version of Ralfe’s challenge to the cult of the equity. But “the FTSE at 3,700 concentrates the mind wonderfully”. The combination of increased longevity and low returns is, he said, a “double whammy”.

The equity cult clearly suited both the City and the government. But a weak equity market can be devastating – particularly with FRS 17. The result is many fund deficits – “some very large”. Finally, he said, the penny is dropping, and trustees are increasingly unhappy. Unfortunately, legal protection for pension fund members in the UK is very weak – while, conversely, trustees have very onerous legal responsibilities and “could be sued”.

Adding to the pensions problem, actuaries (who have, in the past, been subject to tremendous competitive pressures) are increasingly afraid. As a result, everyone is now talking about bond- matching – vide the correspondence columns of the Financial Times over the last 10 days.

In Ralfe’s opinion, the actuarial profession is at a crossroads. Its approach over the last 10 years “has had no theoretical basis” – and it will have to change. But what will that mean? Ralfe predicted:

• that the shift from equity into bonds will continue; • that this will mean a continued drag on equity markets; • that many companies will have to increase their pension contributions to compensate for the deficits; and • that “major companies could go bust” with big pension fund deficits.

He pointed out that we have had a “very benign” 5-10 years. The situation is not going to be so benign – and that “will put the cat among the political pigeons”. He envisaged “big companies with big pension funds in deficit in marginal seats”.

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That said, Ralfe also noted that the US is trailing both thinking and practise in the UK. When the same problems hit there, “it will dwarf the UK”.

Are we seeing the death of occupational pensions? Certainly, Ralfe said, “we wouldn’t invent final salary schemes if they didn’t exist” – and their real cost is finally hitting home. B. Michael Karagianis

As an Australian, Karagianis said he offered “an external perception”. In Australia, a compulsory defined contribution scheme was introduced around 10 years ago, and most new schemes (compulsory or voluntary) are DC. As a result, risk has been transferred from the company to the pension fund owners.

In his view, occupational pensions are on the way to being dead and buried in the UK – which means that there is a tremendous need to optimise portfolio construction. “Bubbles move on” – and Karagianis noted that this is not just true of tech stocks and the tech bubble. In 1990-91, the property bubble burst; in 1994, the bond bubble burst. This is all part of the investment cycle, and it emphasises how important diversification is. Over 10 years or so, “we don’t know what will outperform” because “everything goes through a cycle”.

...but That said, he noted that, at the moment, there is “heightened volatility” in almost all asset classes – which makes it difficult to devise financial solutions that fit the shift towards DC schemes. the bond Plus, one cannot simply shut down all defined benefit schemes – though some will, indeed, be cult may closed. Instead, he suggested, the existence (or otherwise) of corporate pension fund deficits also be will become an important indicator of corporate health. in Karagianis noted that, despite its “bond culture”, Continental Europe faces just as big problems trouble funding its pensions promises. Indeed, “if everyone runs into bonds”, that alone will precipitate a bubble.

Karagianis pointed out that, at present, over 50% of FTSE 100 pension funds are in deficit. “Corporates cannot weather this pain.” They will, therefore, have to shift the pain to the pension- holder.

However, it is hard to get a handle on just how much pain is involved. There can be a huge variation in assumptions, particularly on equity returns, but also on inflation. In Karagianis’s view, “diversification is the only way to address this” – and that means not just diversification into bonds, but also into commercial and residential property etc. He noted that, in 1990, the average UK pension fund had 20% of its portfolio in commercial property; now, it is only 1%. Plus, there needs to be global diversification; as he put it, there are “lots of bond markets” and lots of opportunity for greater currency diversification. There is a “big investment world out there”.

That said, it is obvious that UK investors are too deeply into equity. They attribute too much to equity, and don’t appreciate the risk. They are, at the same time, under-represented in property, non-UK investments, emerging market assets, corporate debt, and even high-yield debt. As for what constitutes the “optimal” portfolio at the present time, Karagianis admitted that he doesn’t “like UK gilts at all”, and feels that most pension funds would be better off with hedged foreign bonds, corporate debt or even cash. If one has to have equity exposure, better look at offshore and emerging markets assets.

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Don’t C. Christine Farnish write off Farnish began by expressing hope for a revival of occupational pensions. It would certainly be occupational desirable to improve workplace pension provision. As she pointed out, the UK has a “very pensions mean” state pension, as a result of the fact that the government spends only 5% of GDP on pension provision. In contrast, private pension schemes are generally well-established; most of these, she reminded the audience, are workplace pensions.

The growth of these has been impressive. In 1936, just 13% of UK workers had an occupational pension. By 1956, this had risen to 28%, and by 1976 it was over 50%. Workplace pensions started as voluntary programmes initiated by managements to encourage recruitment and retention of staff. Unfortunately, in recent years, governments have tended to undermine this structure. In the 1970s, for instance, the government of the day invented the second state pension, and followed this with the option of opting out. As a result, the clear dividing line between state and private provision has become fuzzy.

Farnish noted that, in 1988, personal pensions were launched with a lot of fanfare. Ever since, she said, occupational pensions schemes have faced difficulties. Young, hard-up workers began to value money in their pay packets, rather than pension contributions, and this continued during the 1990s – particularly given the buoyancy of equities (which put off the urgency of saving).

At the same time, occupational pensions became more onerous for employers as a result of the 1995 (post-Maxwell) Pensions Act. Compulsory index-linking and compulsory spousal benefits made the price tag for occupational pensions that much more burdensome. Then came Gordon Brown’s 1997 ACT tax raid, which took £5 billion a year out of occupational schemes. As she said, “the NAPF cried foul”, but many others simply couldn’t see beyond the end of the equity bubble.

Now, we find ourselves in very difficult market conditions, and, at the same time, firms are being pressurized into following the FRS-17 accounting standard, which gives a “snapshot” picture of pension fund assets and liabilities.

This has had a devastating effect on occupational pension schemes. As she said, in May 2002, there was “no problem on average” for the pension funds of FTSE-100 companies. By September, there was an apparent “black hole” of £150 billion. Even though that seems to have fallen a bit (to £130 billion in December and £90 billion now), “who knows what it will be in a few months or years time?”. The cost of equity volatility is now very visible.

This is obviously important for a lot of people. Farnish pointed out that there are about 25 million contributors or beneficiaries of current occupational defined benefit or defined contribution schemes – 22 million in DB schemes, and 3 million in DC schemes. But schemes are maturing, and, as they mature, the cost to the employer will go up as a result of longevity, and because of more onerous regulatory requirements.

Ten years ago, she said, employers put 5% on average into payroll pension schemes. Now, 15- 25% of total payroll costs go in – and that total is still rising. Plus, she warned, 18% of NAPF members closed their final salary schemes to new members last year. This means that 30% are now closed to new members. Very soon, younger workers will effectively be unable to access final salary schemes, except in the public sector.

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This is a very disturbing development. According to the NAPF’s annual survey, the pace of closure of final salary schemes has doubled in the last 12 months – with companies complaining bitterly of both cost and bureaucracy. Inevitably, there is some herd behaviour: some employers are “transfixed” by the problem, and are not thinking longer term or about how to motivate workers. But it is a real problem. Equally, very few workers are really looking at their own options – in particular, they are not looking at the various alternatives.

This may be changing. Over the last year, the increasing focus on pensions has meant that people are more clued up.

Looking forward, Farnish insisted that workplace pension schemes are not dead – “but they will look different”. In her view, the larger occupational schemes can deliver pensions in a very cost- effective way, with huge economies of scale, “if you take out the red tape”. Plus, she pointed out, people don’t buy pensions of their own volition – so workplace schemes make even more sense. But size is important; risk pooling is far easier in a big scheme. In her view, the future might be one of more mixed schemes – some elements of DB, combined with elements of money purchase. “Hybrid schemes have a lot going for them”, and need more support. D. Stephanie Hawthorne In a brief response, Hawthorne insisted:

• that we must take a “holistic” approach to pensions provision: In her opinion, final salary schemes are doomed without the right framework from government. “Trust is out of the window”, so the government’s role is very important indeed. • that age discrimination must be addressed: A big part of the answer to the pensions problem must be for people to work longer.

That said, she pointed out that, at the moment, “a £50,000 a year annuity costs £1 million”. The young simply don’t value pensions enough. 7. Session five: Final panel and closing address

This session, which was also chaired by Michael Pomery, included:

• a comment by John Hawksworth, from PwC; and • a presentation by Howard Flight MP, the shadow chief secretary to the Treasury (and a former fund manager). A. John Hawksworth

Hawksworth began by posing three questions:

• should we spend more on the state pension? • will private pensions fill the gap? and • what should be the structure of state pensions in the future?

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The government projects that spending on the state pension will continue to be around 5% of GDP – but that there will be a big change in how it is structured. In particular, the basic state pension, which currently accounts for around 80% of the spend, will account for just 40% by 2050, and there will be a huge shift towards means-testing through the pension credit.

Hawksworth noted that UK state pension provision is “incredibly mean” compared with most other EU countries – but that they face “big funding issues”. Maybe we could spend more money on pensions – but probably not too much, giving the demands from other sectors. He listed the NHS, long-term care, education, law and order, defence and transport. “So, 5% is more or less fixed”, unless the government is prepared to countenance large tax increases.

Unfortunately, given that there will be a rising number of pensioners over the next 40 years, that means the average payment will tend to fall relative to average earnings. He suggested that the average state pension payment per pensioner (including the state second pension and the pension credit) will fall from around 20% of average earnings to only around 14% by 2040.

Will the private sector make up the gap? Assuming that the net real rate of return on investment is around 3½% and that contribution rates continue at current levels, “we don’t think private pensions will fill the gap”; indeed, they may decline a bit relative to average earnings. Taking state and private pensions together, “we estimate that the average payment per pensioner will fall from around one-third of average earnings today to around one-quarter by 2040”.

How do we turn this around? Will people want to save more? Will they be prepared (or able) to work more? Will they accept a lower relative standard of living in retirement?

What about the structure of state pensions? Hawksworth said he believed that we must reform the state pension system in the long term – particularly given that there will be an “inevitable adverse incentive” to save more or work for longer in that 40% of earnings may be clawed back through the pension credit for low and moderate earners. “We need an alternative.” His personal view is:

• that we should raise the basic state pension to the MIG level, index it to earnings, and thereby eliminate means-testing through the pension credit; and • that, to pay for this, we should abolish the state second pension and associated rebates – everyone will opt-in to the improved basic state pension.

Hawksworth also urged a debate about the state pension age, and suggested that consideration might be given to other ideas, such as a funded top-up to the basic state pension (as recommended by Frank Field’s Pension Reform Group). He concluded that the whole issue of state pensions “needs a serious debate” – which was not provided in the Green Paper. B. Howard Flight MP

Flight began by recollecting that he had set up his own company’s pension scheme 16 years ago – so it was a territory with which he had practical experience. What has happened to pensions over the last six or seven years is “a huge indictment of Labour’s economic management”.

He predicted that people under 60 will almost inevitably get a lower occupational pension than they had anticipated, that defined benefit schemes will be frozen, and that money purchase schemes will deliver a lot less than had been expected. People are likely to need to use the equity

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This is that they have built up in their houses as a source of income for retirement – but that is an area a that needs better regulation than it has at the moment. growing “People don’t fully appreciate what is happening” because the generation that is most affected political hasn’t yet retired. But don’t forget: “pensioners have votes”. issue Flight said that, in his view, Gordon Brown had taken office in the belief that middle class occupational pensions were too generous and could do with some cutting back. He wondered also whether Brown might have had “a veiled agenda for compulsion”. In Flight’s view, within a couple of years, “there will be a pretty strong case in favour of compulsion”, given that the number of people in occupational and personal pension schemes is falling.

This situation has deteriorated rapidly. In 1995, Flight said, the UK was the best-placed country in the world in terms of pensions. In particular, there were more occupational pension schemes than anywhere else. But, ahead of the 2001 election, he said, “I told Michael Portillo to attack Labour on the developing pensions problems” – the £5 billion tax raid, the failure of stakeholder pensions, the shift from defined benefit schemes to cheaper money purchase schemes, and the cut in corporate contributions. Large companies, he said, are turning to money purchase schemes, and where there are defined benefit schemes, most are now frozen to new members. For smaller companies, he added, defined benefit schemes are increasingly being “frozen to everyone”.

Flight attacked the “nonsense” over stakeholder pensions. Given the MIG and pension credit, the lower 60% of the population (in income terms) has no incentive to save for a pension. In his view, the pension credit will be a disaster, at least in terms of encouraging a voluntary savings culture. He suggested again that there is a “stealth agenda for compulsion”.

He said that at least 40% of final salary schemes in the private sector are now frozen to new employees. In addition, corporate contributions to money purchase schemes are down by up to half.

What about annuities? Flight pointed to the example of Canada, which abolished the compulsory purchase of annuities 15 years ago, following which its stakeholder-type schemes are now used by 40% of the workforce. Ireland has also ended its compulsory annuity purchase rules, and doesn’t seem to find itself worrying about the things that concern the UK Inland Revenue. He noted that the Inland Revenue paper proposes that the annuity requirement should be abolished – permitting drawdown to continue beyond 75, and it is bizarre that the government cannot make its mind up on something so important.

What about the £5 billion pension tax? Flight noted that the UK equity market has fallen approximately 50% more than the US market since 1997. He attributed this in part to the accelerated closure of final salary schemes following the pensions tax. Companies have been looking to transfer pension risk, but once a scheme is frozen, the portfolio mix has to be rebalanced – “there are more natural sellers of equities”. He reminded his audience that, in 1997, he warned in his Arundel manifesto that Labour would introduce the ACT pension tax.

Now, there is a danger that the “Maersk-type problem” will spread. There will be more and more concern about how the cake is divided, in the event of a pension fund liquidation, between contributors and those who are already in pension.

What about the public sector? Flight said that, in the UK, only one in seven works in the public sector – but there are now more final salary scheme members in the public sector than there are

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in the private sector. He pointed out that the government plans to apply FRS-17 in 2003/04 – which will flag up the unfunded pension liabilities of the private sector (of at least £400 billion) and may further accelerate the closure of final salary schemes. What can one do?

In his view, “any wise government would look to take the pressure off corporate profitability”. Instead, the corporate sector is increasingly being taxed out and crowded out.

Some final salary schemes will continue – but they may have to be restructured. In his opinion, “final salary schemes will be like the mutual building societies which have survived”. Annuities will be a very big issue. As he pointed out, there is an “understandable concern that people may be buying at the bottom of the inflation and interest rate cycle”. There is no assurance that low inflation will persist long term – and this is a very legitimate concern. Plus, there is a real resentment among pensioners at being told that they have to buy an annuity: this is “patronising and out-of-date”.

In Flight’s view, the state pension for later life should be at the minimum income level. If it were, many of the present problems would fall away – eg the arguments for retaining the compulsory obligation to buy an annuity and the need for the pension credit.

“Look at South Africa”, he said. There have long been money purchase schemes; black South Africans can retire from the mines at 55 with a lump sum which they are free to use to set up their own business. This “has worked”.

In the latest Green Paper, the most obvious problem is the £1.4 million lifetime pension limit. The claim that only three thousand will be affected is nonsense: “Unilever has 200”. As he pointed out, a £60,000 final salary indexed pension requires £1.4 million as its annuity capital cost. Effectively, this is an attempt to reduce pensions by stealth; at present, under the cap, the effective tax-advantaged limit is £1.8 million. In Flight’s view, proposals like this will discourage final salary schemes. If there must be a limit (and he was unconvinced), it must be higher.

In addition, the proposal that all pension funds will have to file annual returns with the Revenue will add a huge and unnecessary level of bureaucracy – and new costs.

That said, he identified one positive in the government’s proposal. It would enable credit card and loyalty card operators to offer pension contributions as a benefit (eg as an alternative to air miles) – if the contribution rules were abolished. “That could be useful.”

Some final thoughts:

• The occupational pension base is crucial. What we need is incentives to ensure that occupational pensions schemes don’t cost so much that employers have no incentive to operate them. We need to increase the motivation to offer them. • In the US, the incentives for 401K schemes “seem to have worked”, and should be considered over here. • What happens to the state pension is crucial. In Flight’s view, “higher pensions for the elderly are crucial”, and we must address the problem that the means-tested pension credit inevitably discourages savings. • We have got to abolish the annuity requirement.

For Flight, the DWP paper is “feeble”. But the pension issue is crucial, and it will be very important for the next election.

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C. Discussion

McDowell began by disagreeing very strongly with Ralfe on the equity culture. Actuaries are not the “high priests” of the equity culture. “I would be amazed if John Ralfe convinced anyone in the US.”

Surprisingly perhaps, this criticism of Ralfe was picked up by others. Rosemary Mounce, for instance, argued that “Boots is only reading page one”, and that Ralfe had grossly underestimated the risks of fixed interest and gilts.

As for occupational pensions, she predicted “death by a thousand cuts” – though she also predicted that “we will regret what is happening”.

Altmann tried to sum up. Is there a crisis? Yes; we made promises that we cannot afford, and we relied on equity returns that we cannot assume. As a result, we have to look more to fixed income assets – “but other schemes cannot do what Boots did”. In her view, final salary schemes are “not safe”, and we should make people aware of the risk – particularly if the company goes bust. “They could lose everything.” Unless we put in mutual insurance for everyone in these schemes, we will see more and more people losing their money “and confidence will drain away”. Plus, in the event of a fund liquidation, it is crucial to divide up the assets more fairly.

That said, Altmann was not that enamoured of final salary schemes. They are not the only way. Plus, they discriminate against older workers, and they really don’t fit with modern work patterns.

Farnish agreed – adding that “no pension saving is totally risk-free”.

32 CSFI 5 DERBY STREET, LONDON W1J 7AB Tel: 020-7493 0173 Fax: 020-7493 0190 E-mail: [email protected] Web: www.csfi.org.uk C S F I

Appendix I

List of participants

Dr Ros Altmann, Governor of the LSE Mr Stuart Anderson, Pensions Age Ms Pam Atherton, Freelance journalist Mr Michael Bell, Century Life plc Mr Graham Bishop, GrahamBishop.com Mr Joe Bolger, The Independent Mr Jonathon Boyd, IFA Online.com Ms Evelyn Brodie, Bloomberg News Mr Ned Cazalet, Cazalet Consulting Mr John Chapman, Money Management Mr John Chown, Chown Dewhurst LLP Mr Brian Clegg, NASUWT Mr Geoff Coggins, Association of Teachers & Lecturers Mr Nicholas Cole, Railway Maritime & Transport Workers Union Mr Jim Cousins MP Mrs Angela Crum Ewing, Universities Superannuation Scheme Ltd Mr Humphry Crum Ewing, Associate Fellow of RUSI Mr Piers Currie, Aberdeen Asset Management Mr Chris Curry, Pensions Policy Institute Ms Annette Dalchow, NATFHE Mr Chris Edge, Pavillion Asset Management Mr Carl Emmerson, Institute for Fiscal Studies Mr Michael Ennion, Wesleyan Assurance Society Ms Christine Farnish, NAPF Mr Francis Fernandes, Lane Clark & Peacock Mr Frank Field MP Mr Alex Field, Dow Carter Mr Tim Finch, ASLEF Mr Howard Flight MP Mr Patrick Gifford, Murray Income plc Dr John Ginarlis, Consultant Mr John Greenwood, Money Marketing Ms Lindsey Harrison, Gavin Anderson Ms Liz Hartley, Datamonitor Mr John Hawksworth, PricewaterhouseCoopers LLP Ms Stephanie Hawthorne, Pensions World Ms Heléna Herklots, Age Concern England Professor John Hills, CASE LSE Dr Andrew Hilton, CSFI Mr Geoff Ho, Professional Pensions Mr John Hough, ASPEN (Actuaries & Pensions Consultants) plc Mr Gary Hyde, Musicians Union Mr Bob Hymas, BDO Stoy Hayward

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Mr Simon Johnson, Reuters Mr Alexander Jolliffe, The Financial Times Mr Michael Karagianis, Aberdeen Asset Management Mr Jim Keane, Akzo Nobel Ltd Mr Con Keating, Finance Development Centre Mr Paul Kelly Mr Bryan King, Pre-Retirement Association Mr Martin Kinney Mr Mervyn Kohler, Help the Aged Mr Dawid Konotey-Ahulu, Merrill Lynch Mr Matt Kovac, Daily Mail Mr Robert Laslett, Charles River Associates Ltd Mr Marc Lee, Cityforum Ltd Mr Desmond Le Grys, Age Concern Enterprises Miss Patricia Lough, Fraser Anderson & Partners Ltd Mr Philip May, Deutsche Asset Management Mr John Menon, Bloomberg News Mr Mick McAteer, Consumers’ Association Mr Patrick McDonnell, Citigroup Asset Management Dr Oonagh McDonald, Retirement Income Reform Campaign Mr Robert McDowell, Banking and Securities Industry Consultants Mr John McFall MP, Treasury Select Committee Mr Simon Meek, Professional Pensions Mr John Moret, Winterthur Life UK Ltd Ms Rosemary Mounce, Universities Superannuation Scheme Ltd Mr David Parry, Datamonitor Mr Richard Plaskett, Aberdeen Asset Management Mr Michael Pomery, Hewitt Bacon & Woodrow Mr John Ralfe, formerly head of corporate finance at Boots Mr Barry Riley, Freelance journalist Ms Claire Ryan, Pensions Ombudsman Ms Veronica Scott, Cityforum Mrs Angela Sharma, Sacker & Partners Ms Jane Skerrett, National Benevolent Fund for the Aged Mr Paul Smee, AIFA Ms Samantha Smith, OPRA Mr Robert Stansfield, Pensioners’ Voice (NFRPA) Mr Nicholas Stephens, Datamonitor Ms Rachel Stevenson, The Independent Mr Peter Thompson, NAPF Mr Dave Tyson, ASLEF Mr Andrew Verity, BBC News Mr Toby Wallace, Aberdeen Asset Management Mr Alan Waton, Association of University Teachers Mr Steve Webb MP Mr Kevin Wesbroom, Hewitt Bacon & Woodrow Mr David White, Investment & Pensions Europe Mr Barry Wilkins, OPAS (The Pensions Advisory Scheme) Ms Pauline Wood, Accenture Mr Hamish Worsley, Tintansim Mr Keith Wrightson, Stakepension.com Ltd

34 CSFI 5 DERBY STREET, LONDON W1J 7AB Tel: 020-7493 0173 Fax: 020-7493 0190 E-mail: [email protected] Web: www.csfi.org.uk C S F I

Appendix II

Agenda

PENSIONS IN CRISIS? Restoring Confidence

Wednesday 26 February 2003 - National Liberal Club, Whitehall, SW1A 2HE

A Forum with the Centre for the Study of Financial Innovation & The Retirement Income Reform Campaign

Co-sponsored by Hewitt Bacon & Woodrow & Aberdeen Asset Management and Pensions World

09:15 – 11:35 THE GOVERNMENT RESPONSE TO THE PENSIONS PROBLEM – WHAT IS IT? IS IT SUFFICIENT?

Chairman: Dr Oonagh McDonald (RIRC)

Moderator: Dr Andrew Hilton (CSFI)

09:15 – 10:25 Panel Contributions Mr Steve Webb MP (Liberal Democrat Spokesman for Work & Pensions) Mr Carl Emmerson (Institute for Fiscal Studies) Mr Robert McDowell (Banking & Securities Industry Consultants) Mr Kevin Wesbroom (Hewitt Bacon & Woodrow) Mr Jim Cousins MP (Treasury Select Committee) to join the Round Table

10:25 Morning Coffee

10:50 – 11:35 Round Table Discussion

11:35 – 12:35 WHAT IS THE CONSUMER INTEREST?

Chairman: Dr Oonagh McDonald

11:35 – 12:15 Panel Contributions Mr Mick McAteer (Consumers’ Association) Mr Paul Smee (AIFA) Dr Oonagh McDonald

12:15 – 12:35 Round Table Discussion

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12:35 – 13:50 LUNCH WITH GUEST: THE RT HON FRANK FIELD MP

13:50 – 15:05 CAN THE FINANCIAL SERVICES INDUSTRY DELIVER A PENSIONS SOLUTION?

Chairman: Mr Piers Currie (Aberdeen Asset Management)

13:50 – 14:40 Panel Contributions Mr Graham Bishop (Graham Bishop.com) Mr Ned Cazalet (Cazalet Consulting) Mr John Chown (Chown Dewhurst / IFSL Pensions Group) Mr Barry Riley (Contributor to the Financial Times) Mr Dawid Konotey-Ahulu (Merrill Lynch)

14:40 – 15:05 Round Table Discussion

15:05 Afternoon Tea

15:20 – 16:15 THE DEATH OF OCCUPATIONAL PENSIONS – EXAGGERATED OR REALISTIC?

Chairman: Mr Michael Pomery (Hewitt Bacon & Woodrow)

15:10 – 15:50 Panel Contributions: Ms Christine Farnish (NAPF) Mr John Ralfe (Formerly of Boots) Mr Michael Karagianis (Aberdeen Asset Management) Ms Stephanie Hawthorne (Pensions World) to join the panel

15:50 – 16:15 Round Table Discussion

16:15 – 17:05 FINAL PANEL AND CLOSING ADDRESS

Chairmen: Mr Michael Pomery & Dr Andrew Hilton

16:15 – 16:25 Mr John Hawksworth (PricewaterhouseCoopers) to commentate

16:25 – 16:40 Panel Discussion

16:40 – 17:05 Mr Howard Flight MP Shadow Chief Secretary

17:05 CLOSE

This Round Table will be observed by Professor John Hills, Member of Pensions Commission.

N.B. The session Chairmen will decide the running order.

36 CSFI 5 DERBY STREET, LONDON W1J 7AB Tel: 020-7493 0173 Fax: 020-7493 0190 E-mail: [email protected] Web: www.csfi.org.uk C S F I

Annex I

Follow-up meeting: April 10, 2003

After a draft of the present report had been circulated to all participants, a follow-up meeting was held, also at the National Liberal Club. About 30 of the original participants attended, together with a couple of newcomers.

The hope was to agree on a few specific recommendations for government that everyone could subscribe to. Although that hope proved a bit too optimistic, there was a considerable degree of consensus in several areas:

• The pressing need to raise the basic state pension: It was widely accepted that the basic UK pension is extremely ungenerous by international standards, and that this is a main reason for the current pensions crisis. Several specific proposals were floated (including merging the second state pension and the basic pension, and then paying it automatically to everyone over 75), but the main area of agreement is that the basic pension is too low. • The need to rethink the pensioner credit: Although it was accepted that nothing could be done about it at this stage, it was widely accepted that the pensioner credit could act as a disincentive to saving. At the least, the government should commit to a review after, say, five or 10 years. Linked to this concern was a wider worry about means-testing; there was some support for the idea that it would be better for benefits to be more universal, and for the government then to claw back money from the more affluent through the tax system. • The “one percent world” will not work: There was general agreement that, as it stands, the UK fund management industry cannot afford to sell the kinds of products the government wants on the fee basis that is currently proposed. The government is trying to get the private sector to meet its targets (“to do its own work for it”, as one said) – but it is not prepared to pay enough. A 1% commission structure is simply unrealistic. Unfortunately, it was also recognised that, in the present investment climate, increasing commissions would take a very large bite out of projected equity returns – making it hard to convince savers that the extra risk associated with equities (say, over cash ISAs) is warranted. There is no obvious answer to this (though the government was urged to look at the buying power model of the US Federal thrift savings plan), but government must address the issue honestly and openly. • There was a significant majority in favour of doing away with sex discrimination in annuity purchase: This was not unanimous, and proponents had different reasons (the narrowing demographic gap, the ECJ’s recent rulings, a preference for the Continental “solidarity” model over the traditional market approach). It was also recognised that elderly women may them- selves suffer if male pensions are cut. But the sense of the meeting was that the existing system is wrong. • Compulsion cannot be ruled out. The recent Accenture study (which suggested that three- quarters of employees would favour a mandatory contribution, if employers matched it) sug- gests that the government’s preference for a market approach may need re-evaluating. • There needs to be better data: Serious questions were raised about the accuracy of the govern- ment’s actuarial tables. If they are accurate, it was suggested, annuities are substantially too expensive. Greater transparency in this area is in order. The meeting also expressed its disap- pointment that inadequacies in data collection and incompatibilities in computer systems mean that the government is unable to provide Frank Field with an answer to his question as to how much people will receive in total state and private pensions over (say) the next five years.

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• There must be better financial education: This is obvious, and the meeting was split on how it should be provided, and at what age. But it was accepted that virtually no one in the general public understands what an annuity is, or what is the nature of the financial contracts that they are being urged to enter into. • The government should investigate the “depoliticization” of pensions: While pension rights and obligations are a legitimate issue for political parties, it was recognised that this kind of inherently long-term problem does not sit well with the normal political cycle. It is, therefore, hard to make politicians truly accountable for their pensions decisions. Other countries (eg Sweden) have had some success in making pensions a non-partisan issue. Perhaps the new advisory Pensions Commission (chaired by Adair Turner) could eventually take on the kind of apolitical role with regard to pensions that the MPC takes on monetary policy.

Andrew Hilton

38 CSFI 5 DERBY STREET, LONDON W1J 7AB Tel: 020-7493 0173 Fax: 020-7493 0190 E-mail: [email protected] Web: www.csfi.org.uk CSFI PUBLICATIONS

1. “Financing the Russian safety net”: A proposal for Western funding of social security in Russia, £40/$65 coupled with guarantee fund for Western investors. By Peter Ackerman/Edward Balls. September 1993

2. “Derivatives for the retail client”: A proposal to permit retail investors access to the risk £10/$15 management aspects of financial derivatives, currently available only at the wholesale level. By Andrew Dobson. Nov 1993 (Only photostat available)

3. “Rating environmental risk”: A proposal for a new rating scheme that would assess a £25/$40 company’s environmental exposure against its financial ability to manage that exposure. By David Lascelles. December 1993

4. “Electronic share dealing for the private investor”: An examination of new ways to broaden £25/$40 retail share ownership, inter alia, by utilising ATM networks, PCs, etc. By Paul Laird. January 1994

5. “The IBM dollar”: A proposal for the wider use of “target” currencies, i.e. forms of public or £15/$25 private money that can be used only for specific purposes. By Edward de Bono. March 1994

6. “UK financial supervision”: A radical proposal for reform of UK financial regulation, £25/$40 (prepared pseudononymously by a senior commercial banker). May 1994

7. “Banking banana skins”: The first in a periodic series of papers looking at where the next £25/$40 financial crisis is likely to spring from. June 1994

8. “A new approach to capital adequacy for banks”: A proposal for a market-based alternative, using the £25/$40 concept of ‘value-at-risk’, to the present mechanistic Basle approach to setting bank capital requirements. By Charles Taylor. July 1994

9. “New forms of Euro-Arab cooperation”: A proposal for a new public/private development finance £25/$40 corporation to promote employment-generating projects in the Arab world. By Jacques Roger-Machart. October 1994

10. “Banking banana skins II”: Four leading UK bankers and a senior corporate treasurer discuss lessons £25/$40 for the future from the last banking crisis. November 1994

11. “IBM/CSFI essay prize”: The two winning essays for the 1994 IBM/CSFI Prize. £10/$15 November 1994

12. “Liquidity ratings for bonds”: A proposed methodology for measuring the liquidity of issues by scoring £25/$40 the most widely accepted components, and aggregating them into a liquidity rating. By Ian Mackintosh. January 1995

13. “Banks as providers of information security services”: Banks have a privileged £25/$40 position as transmitters of secure data: they should make a business of it. By Nick Collin. February 1995

14. “An environmental risk rating for Scottish Nuclear”: An experimental rating of a nuclear utility. £25/$40 By David Lascelles. March 1995

15. “EMU Stage III: The issues for banks”: Banks may be underestimating the impact of Maastricht’s small print. £25/$40 By Malcolm Levitt. May 1995

16. “Bringing market-driven regulation to European banking”: A proposal for eliminating systemic £10/$15 banking risk by using cross-guarantees. By Bert Ely (Only photostat available). July 1995

17. “The City under threat”: A leading French journalist worries about complacency in the City of London. £20/$35 By Patrick de Jacquelot. July 1995

18. “The UK building societies: Do they have a future?”: A collection of essays on the future of UK £10/$15 building societies and mutuality. September 1995 (Only photostat available).

19. “Options and currency intervention”: A radical proposal on the use of currency option £20/$35 strategies for central banks. By Charles Taylor. October 1995

20. “Twin peaks”: A regulatory structure for the new century” A proposal to reform UK financial regulation £25/$40 by splitting systemic concerns from those involving consumer protection. By Michael Taylor. December 1995

21. “Banking banana skins III”: The findings of a survey of senior UK figures into where the perceived £25/$40 risks in the financial system lie. March 1996

22. “Welfare: A radical rethink - The Personal Welfare Plan”: A proposal (by a banker) for the private £25/$40 funding of health, education, unemployment etc. through a lifetime fund. By Andrew Dobson. May 1996 23. “Peak Practice”: How to reform the UK’s regulatory structure. Implementing “Twin Peaks”. £25/$40 By Michael Taylor. October 1996

24. “Central bank intervention: a new approach”: A radical approach to central bank £25/$40 intervention – without foreign exchange reserves. By Neil Record. November 1996

25. “The Crash of 2003: An EMU fairy tale.”: An all too plausible scenario of £25/$40 what might happen if EMU precedes economic convergence. By David Lascelles. December 1996

26. “Banking Banana Skins: 1997”: A further survey showing how bankers £25/$40 might slip up over the next two or three years. April 1997

27. “Foreign currency exotic option”: A trading simulator for innovation dealers £25/$40 in foreign currency (with disc). Winner of the 1997 ISMA/CSFI Prize for finnancial innovation. By Stavros Pavlou September 1997

28. “Call in the red braces brigade... The case for electricity derivatives”: Why the UK £25/$40 needs an electricity derivatives market, and how it can be achieved. By Ronan Palmer and Anthony White. November 1997

29. “The fall of Mulhouse Brand”: The City of London’s oldest merchant bank collapses, triggering £25/$40 a global crisis. Can the regulators stave off the disaster? A financial thriller based on a simulation conducted by the CSFI, with Euromoney and PA Consulting Group, to test the international system of banking regulation. By David Shirreff. December 1997

30. “Credit where credit is due: Bringing microfinance into the mainstream”: Can lending £25/$40 small amounts of money to poor peasants ever be a mainstream business for institutional investors? By Peter Montagnon. February 1998

31. “Emerald City Bank... Banking in 2010”: The future of banking by eminent bankers, £25/$40 economists and technologists. March 1998. (Only photostat available).

32. “Banking Banana Skins: 1998”: The fifth survey of possible shocks to the system. £25/$40 July 1998

33. “Mutuality for the 21st Century”: The former Building Societies Commissioner argues the £25/$40 case for mutuality, and proposes a new legislative framework to enable it to flourish. By Rosalind Gilmore. July 1998

34. “The role of macroeconomic policy in stock return predictability”: The 1998 ISMA/CSFI £25/$40 prizewinning dissertation analyses how government policies affect stock values in markets in Japan and the Far East. By Nandita Manrakhan. August 1998

35. “Cybercrime: tracing the evidence”: A working group paper on how to combat £6/$10 Internet-related crime. By Rosamund McDougall. September 1998

36. “The Internet in ten years time: a CSFI survey”: A survey of opinions about where £25/$40 the Internet is going, what the main obstacles are and who the winners/losers are likely to be. November 1998

37. “Le Prix de l’Euro Competition between London, Paris and Frankfurt”: This report sizes £25/$40 up Europe’s leading financial centres at the launch of monetary union. February 1999

38. “Psychology and the City: Applications to trading, dealing and investment analysis”: A social £25/$40 psychologist looks at irrationality in the financial services sector. By Denis Hilton. April 1999

39. “Quant & Mammon: Meeting the City’s requirements for post-graduate £25/$40 research and skills in financial engineering”. A study for the EPSRC on the supply of and demand for quantitative finance specialists in the UK, and on potential areas of City/academic collaboration. By David Lascelles. April 1999

40. “A market comparable approach to the pricing of credit default swaps”. Winner of the £25/$40 1999 ISMA/CSFI prize for financial innovation. By Tim Townend. November 1999

41. “Europe's new banks: The non-bank phenomenon”. A report for euro-FIET on the threat posed £25/$40 by new technology to European banks' traditional franchise. By David Lascelles. November 1999

42. “In and Out: Maximising the benefits/minimising the costs of (temporary or permanent) non- £25/$40 membership of EMU”. A look at how the UK can make the best of its ambivalent euro-status. November 1999 43. “Reinventing the Commonwealth Development Corporation under Public-Private Partnership”. £25/$40 By Sir Michael McWilliam, KCMG. March 2000

44. “Internet Banking: A fragile flower” Pricking the consensus by asking whether retail banking £25/$40 really is the Internet's “killer app”. By Andrew Hilton. April 2000

45. “Banking Banana Skins 2000” The CSFI's latest survey of what UK bankers feel are the biggest £25/$40 challenges facing them. June 2000

46. “iX: Better or just Bigger?” A sceptical look at the proposed merger between the Deutsche Boerse £25/$40 and the London Stock Exchange By Andrew Hilton and David Lascelles. August 2000

47. “Bridging the equity gap: a new proposal for virtual local equity markets” A proposal for local stock £25/$40 exchanges, combining Internet technology and community investment. By Tim Mocroft and Keith Haarhoff.

48. "Waking up to the FSA" How the City views its new regulator. By David Lascelles. May 2001 £25/$40

49. "The Short-Term Price Effects of Popular Share Recommendations" Winner of the £25/$40 2001 ISMA/CSFI Essay Prize. By Bill McCabe. September 2001

50. "Bumps on the road to Basel: An anthology of views on Basel 2" This colleaction of sixteen (very brief) £25/$40 essays offers a range of views on Basel 2. Edited by Andrew Hilton. January 2002

51. "Banana Skins 2002: A CSFI survey of risks facing banks" What bankers are worrying about at the £25/$40 beginning of 2002. Sponsored by PricewaterhouseCoopers. By David Lascelles. February 2002

52. "Single stock futures: the ultimate derivative" A look at a new product being introduced almost £25/$40 simultaneously on each side of the Atlantic. By David Lascelles. February 2002.

53. “Harvesting Technology: Financing technology-based SMEs in the UK” DTI Foresight sponsored £25/$40 report, which examines what has been done (and what will be done) on the financing tech-based SMEs. By Craig Pickering. April 2002

54. “Waiting for Ariadne: A suggestion for reforming financial services regulation” £25/$40/€40 A new proposal for fund management. By Kevin James. July 2002

55. “Clearing and settlement: Monopoly or market?” An argument for breaking the monopoly £25/$40/€40 mindset for ACHs. By Tim Jones. October 2002. ISBN 0-9543145-1-4.

56. “The future of financial advice in a post-polarisation marketplace” A discussion of the structure of £25/$40/€40 financial advice post-CP121 and post-Sandler, with support from Accenture. By Stuart Fowler. November 2002. ISBN 0-9543145-2-2 £25/$40/€40

57. “Capitalism without owners will fail: A policymaker’s guide to reform” A comprehensive look £25/$40/€40 at the debate over transatlantic corporate governance, with detailed recommendations. By Robert Monks and Allen Sykes. November 2002. ISBN 0-953145-3-0.

58. “Who speaks for the city? Trade associations galore” A survey of trade association £25/$40/€40 effectiveness. By David Lascelles and Mark Boleat. November 2002. ISBN 0-9583145-4-9.

59. “A new general approach to capital adequacy: A simple and comprehensive alternative to Basel 2” £25/$40/€40 By Charles Taylor. December 2002. ISBN 0-9583145-4-9.

60. “Thinking not ticking: Bringing competition to the public interest audit” A paper discussing how £25/$40/€40 the system for auditing large company financial statements can be made better. By Jonathan Hayward. April 2003. ISBN 0-9543145-6-5.

61. “Basel Lite”: recommendations for the European implementation of the new Basel accord” £25/$45/€40 By Alistair Milne. April 2003. ISBN 0-954145-8-1.

REGULATORY PAPERS

1. “Accepting failure”: A brief paper from the CSFI’s regulatory working group on the £6/$10 need for the new FSA explicitly to accept the likelihood that banks will fail. By David Lascelles. February 1998

2. “Financial education and the role of the regulator: the limits of caveat emptor”: A £6/$10 brief note of warning to the FSA on what can and cannot realistically be expected of financial education. By Victoria Nye. May 1998

3. ”Independence and accountability: tweaking the Financial Services Authority”: A proposal £6/$10 for fine-tuning FSA governance. By Robert Laslett and Michael Taylor. June 1998

4. “Embracing smoke: The Internet and financial services regulation” £6/$10 A new regulatory framework is necessary for the Internet, most important ‘lose the paper’. By Joanna Benjamin and Deborah Sabalot. June 1999

OTHER REPORTS

Internet and Financial Services: a CSFI report. In-depth analysis of the industry’s key sectors. Please £45/$75 order through City & Financial Publishing. Tel: 01483-720707 Fax: 01483 740603.

“The new world of European e-finance” A book by a panel of experts which looks at the current £40/$65/€65 state of play and future challenges for European e-finance. ISBN 0-9543145-9-X. The Centre receives general financial support from the following institutions:

Abbey National Accenture Barclays Group Citigroup EFG Private Bank Limited International Securities Market Association JP Morgan Chase Merrill Lynch Newsdesk Communications PricewaterhouseCoopers

Alliance & Leicester AMS Aon AVIVA Bank of England BT Global Corporation of London CRESTCo/Euroclear Deloitte Consulting Deutsche Bank DTI/OST Ernst & Young Euronext.liffe Financial Services Authority Fitch Ratings GISE AG Halifax plc HM Treasury HSBC Holdings plc INVESTEC ISMA Centre, University of Reading KPMG Law Debenture Corporation plc Link Interchange Network Lloyd’s of London LogicaCMG Consulting London Stock Exchange Merlin Financial Communications mi2g Moody’s Risk Management Morgan Stanley International PA Consulting Premchand Roychand & Sons Prudential plc Reuters Royal Bank of Scotland Securities Institute Standard & Poor’s Ratings Group Swiss Re New Markets virt-X

Association of Corporate Treasurers Bankgeselleschaft Berlin Banking Code Standards Board Brigade Electronics Canadian High Commission Chown Dewhurst LLP City Consultants Finance & Leasing Association Financial Times Futures & Options Association GCI Financial The Housing Finance Corporation IFSL Lombard Street Research Record Currency Management Schroders TRW Investment Management Z/Yen

In addition, the Centre has received special purpose support from, among others, Linklaters, Clifford Chance, City & Financial, the Building Societies Association, IBM, The Banker, APCO, the World Bank, and the G30.

UK £25

US $45 Registered Charity Number 1017352 €40 CSFIRegistered Office: Sussex House, 8-10 Homesdale Road, Bromley, Kent, BR2 9LZ CSFI © Registered in England and Wales limited by guarantee. Number 2788116 2003