Is the Telegraph being a bit churlish today, in reporting "anger as state pension rises by just £2.40 a week"? Fair enough, £2.40 a week is not a lot, nor is the £97.65 a week that state pension recipients will get from next April.
But if the then Chancellor, Gordon Brown, hadn't changed the rules in 2001, the state pension may not have gone up at all. The increase has, for many years, been linked to the increase in the September Retail Price Index which, as the Office for National Statistics announced this morning, actually fell by 1.4% last month.
Mr Brown's 2001 change meant the pension would increase by the September inflation rate or 2.5%, whichever is the higher. A point the Telegraph overlooked today. Along with the fact that it was Mrs Thatcher's administration which pegged pension increases to prices back in 1980. Before that, the benchmark was based on whichever was the higher between prices and earnings. Of course, the latter have outstripped the former fairly consistently since 1980, so the state pension, as a percentage of average earnings, fell from over 23% in 1981 to less than 16% by 2006.
In the interests of scrupulous impartiality, however, I should refer you to the same newspaper's coverage of David Cameron's commitment, announced last month, to match the government's intention of restoring the earnings link by 2015 at the latest. As a shrewd politician, Mr Cameron is all too aware of the power of the grey vote at next year's election.
AF
Tuesday, October 13, 2009
Monday, October 12, 2009
Commodity oddity....Citi loses the energy to trade
There's an old investment adage that says 'run your winners and cut your losers' – a refreshingly simple concept for an industry that often does its best to confuse and befuddle. Lately however, this truism has been challenged by the two words that will terrify even the most hardened of bankers – 'executive compensation.' Citi's decision to sell Phibro, its energy trading division, has clearly been motivated by little else than regulatory pressure.
Phibro is a consistently profitable business (I know, how many can say that these days?) that has netted Citi around $371m a year in annual earnings over the past five years. This, as Anthony Currie of breakingviews highlighted: "equates to a profit margin of more than 50%, and has been a bright spot in the last couple of years as Citi posted billions of dollars in losses elsewhere." Granted, Phibro is not a huge business given the monolithic scale of Citigroup. Nevertheless, profits are profits and it was nice to see that a division could stand strong while the rest of Citi's edifice seemingly crumbled.
Occidental Petroleum, the energy and chemical giant, picked up Phibro for just $250m, which many market observers have described as "a pittance" considering the profits it once netted the bank. That said, the sale is not exactly a surprise given Citi's political and economic situation: a troubled bank propped up by the US taxpayer, an obligation to pay star trader Andrew Hall a whopping bonus of $100m, and a government that has executive pay firmly in its sights. Not exactly peaches and roses for the folks at Citi. So, to be fair to their embattled CEO Vikram Pandit, the pressure to hive off Phibro was so overwhelming that to do otherwise would have been untenable.
It's not actually the sale of Phibro that's alarming, as it was undeniably a forced hand, but rather the political machinations that promoted the sale. We all know the era of light touch regulation is behind us but politics and economics don't often make good bedfellows. In a fiery research note from Rochdale Securities' Richard Bove, dramatically titled "Socialism in Action", he argues that the sale does not make good business sense. Bove says the decision was not in the interest of the Citigroup shareholders and "also sets the pattern of what may prove to be a series of similar actions by other banks reacting to the government takeover of the banking industry." It's this aspect, rather than his socialist rant, that's of note and as FT's Alphaville concludes: "the regulatory environment for banks, and the government's tolerance for the high-risk, high-reward model of years past, is changing and not necessarily in what some bank-shareholders see as their interests."
The whole affair also throws the spotlight on the world of commodities trading and the growing band of non-financial players, including producers, dedicated commodity trading houses and utilities, who play an increasingly influential role in the energy trading markets. Many of these companies can dominate sectors of the energy markets, derivative as well as physical, without the same transparency and scrutiny that a bank is under.
Occidental's purchase of Phibro is illustrative of a wider shift in the commodities business and as the FT describes: "the latest episode in an exodus of specialised commodity trading talent from banks coping with greater government say over compensation." After all, why stay at an investment bank and face the constant ire of regulators when you can quietly trade elsewhere and continue to pick up huge pay packages. The FT says that "we live in Financial Times" – more like strange times if you ask me.
JS
Phibro is a consistently profitable business (I know, how many can say that these days?) that has netted Citi around $371m a year in annual earnings over the past five years. This, as Anthony Currie of breakingviews highlighted: "equates to a profit margin of more than 50%, and has been a bright spot in the last couple of years as Citi posted billions of dollars in losses elsewhere." Granted, Phibro is not a huge business given the monolithic scale of Citigroup. Nevertheless, profits are profits and it was nice to see that a division could stand strong while the rest of Citi's edifice seemingly crumbled.
Occidental Petroleum, the energy and chemical giant, picked up Phibro for just $250m, which many market observers have described as "a pittance" considering the profits it once netted the bank. That said, the sale is not exactly a surprise given Citi's political and economic situation: a troubled bank propped up by the US taxpayer, an obligation to pay star trader Andrew Hall a whopping bonus of $100m, and a government that has executive pay firmly in its sights. Not exactly peaches and roses for the folks at Citi. So, to be fair to their embattled CEO Vikram Pandit, the pressure to hive off Phibro was so overwhelming that to do otherwise would have been untenable.
It's not actually the sale of Phibro that's alarming, as it was undeniably a forced hand, but rather the political machinations that promoted the sale. We all know the era of light touch regulation is behind us but politics and economics don't often make good bedfellows. In a fiery research note from Rochdale Securities' Richard Bove, dramatically titled "Socialism in Action", he argues that the sale does not make good business sense. Bove says the decision was not in the interest of the Citigroup shareholders and "also sets the pattern of what may prove to be a series of similar actions by other banks reacting to the government takeover of the banking industry." It's this aspect, rather than his socialist rant, that's of note and as FT's Alphaville concludes: "the regulatory environment for banks, and the government's tolerance for the high-risk, high-reward model of years past, is changing and not necessarily in what some bank-shareholders see as their interests."
The whole affair also throws the spotlight on the world of commodities trading and the growing band of non-financial players, including producers, dedicated commodity trading houses and utilities, who play an increasingly influential role in the energy trading markets. Many of these companies can dominate sectors of the energy markets, derivative as well as physical, without the same transparency and scrutiny that a bank is under.
Occidental's purchase of Phibro is illustrative of a wider shift in the commodities business and as the FT describes: "the latest episode in an exodus of specialised commodity trading talent from banks coping with greater government say over compensation." After all, why stay at an investment bank and face the constant ire of regulators when you can quietly trade elsewhere and continue to pick up huge pay packages. The FT says that "we live in Financial Times" – more like strange times if you ask me.
JS
Thursday, October 8, 2009
Old age isn't so bad when you consider the alternative
George Osborne's proposals on raising the state pension age have helped bring the longevity issue into sharper focus this week, and not before time. An interesting feature of the general reaction to Mr Osborne's comments is the relative equanimity with which the idea has been greeted – even The Guardian approved.
The state pension age has remained unchanged (at 65 for men and, at the moment, 60 for women) since the 1940's. Given that average life expectancy has been increasing by some two years every decade since then, it seems ludicrous that pension ages have failed to keep track. Even allowing for some quite extreme regional variations (figures from Punter Southall show male life expectancy is nearly 84 in Kensington and Chelsea, but only 70 in Glasgow), neither the demographics nor the economics add up.
Clearly, and regardless of who wins next year's election, this will have to change. Post-war UK births peaked at just over one million in 1964. Put another way, more Britons are celebrating their 45th birthday this year than any other age. As a member of that particular cohort, I have to say you'd be hard pressed to find a finer, more upstanding body of men and women. But if all of us retire in 2029, our creaking pension system – already severely stretched – could be brought to its arthritic knees.
So maybe the best way to look at this is, as Hamish Mcrae wrote in yesterday's Independent, to embrace the fact that we are an ageing society, and recognise that "countries that adapt well to ageing, which is happening to every society in the developed world, will become richer, healthier, better balanced and in all probability happier communities than those that fail to tackle an inevitable and indeed welcome feature of this century."
AF
The state pension age has remained unchanged (at 65 for men and, at the moment, 60 for women) since the 1940's. Given that average life expectancy has been increasing by some two years every decade since then, it seems ludicrous that pension ages have failed to keep track. Even allowing for some quite extreme regional variations (figures from Punter Southall show male life expectancy is nearly 84 in Kensington and Chelsea, but only 70 in Glasgow), neither the demographics nor the economics add up.
Clearly, and regardless of who wins next year's election, this will have to change. Post-war UK births peaked at just over one million in 1964. Put another way, more Britons are celebrating their 45th birthday this year than any other age. As a member of that particular cohort, I have to say you'd be hard pressed to find a finer, more upstanding body of men and women. But if all of us retire in 2029, our creaking pension system – already severely stretched – could be brought to its arthritic knees.
So maybe the best way to look at this is, as Hamish Mcrae wrote in yesterday's Independent, to embrace the fact that we are an ageing society, and recognise that "countries that adapt well to ageing, which is happening to every society in the developed world, will become richer, healthier, better balanced and in all probability happier communities than those that fail to tackle an inevitable and indeed welcome feature of this century."
AF
Wednesday, September 30, 2009
Electioneering
"I will stop, I will stop at nothing
Say the right things, when electioneering
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet
Riot shields, voodoo economics
It's just business, cattle prods and the IMF
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet"
Radiohead penned 'Electioneering' back in 1997, shortly after Tony Blair's New Labour government came to power. Despite the cynicism of Oxford's favourite miserablists, there was a sense of general optimism in the air. How things have changed. Their lyrics seem more prescient than ever given Gordon Brown's desperate attempt to rally the troops yesterday in Brighton. Although his speech was certainly defiant, the whiff of electioneering was overpowering.
Brown slammed the City as "ideologically bankrupt" in a speech strewn with rhetoric designed to appeal to Middle England and mobilise core support. His assertion that the credit crisis was a failure of rightwing Conservative ideology certainly left a bitter taste in the mouth. He claimed that "what let the world down" was "the Conservative idea that markets always self-correct but never self-destruct". He then blamed the "right-wing fundamentalism that says you just leave everything to the market and says that free markets should not just be free but values-free".
This element of his speech was, at best, what Hollywood might term a 're-imagining' of the current financial predicament and, at worst, a distortion of the truth. It takes a unique kind of amnesia to completely neglect "his own 10-year record as chancellor – when he championed City interests". After all, Brown is a man who had previously spent years advocating and championing a 'light touch' regulatory system and the notion that the market is a more efficient allocator of capital than the state. Robert Peston snappily articulated this state of affairs in his blog today – "Brown snubs Brown". He outlined that whilst the PM's comments were intended as an attack on the Tories, they really just "put the boot into the Brown years at Number 11".
To be fair, lots of people felt exactly the same way about the City during the economic boom, but for a PM who has demanded financial accountability, previously called for an end of the "age of irresponsibility", and even written a book looking at courage, he has probably emerged from this in a less than heroic light. That said, Sarah Brown felt otherwise as she exclaimed "My husband. My hero!"
A more profitable line of argument for the PM, and one which he developed in yesterday's speech, may be to attack the Conservatives over their lack of economic credibility. As today's Independent points out, "the Prime Minister did have a strong case to make about the hesitant and confused manner in which the Tories reacted to last year's global financial meltdown". In pursuing this line, he would, at least, put the onus back on David Cameron to explain how the Conservatives' calls over recent years for even-lighter-touch financial regulation would have helped to avert the crisis.
JS
Say the right things, when electioneering
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet
Riot shields, voodoo economics
It's just business, cattle prods and the IMF
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet"
Radiohead penned 'Electioneering' back in 1997, shortly after Tony Blair's New Labour government came to power. Despite the cynicism of Oxford's favourite miserablists, there was a sense of general optimism in the air. How things have changed. Their lyrics seem more prescient than ever given Gordon Brown's desperate attempt to rally the troops yesterday in Brighton. Although his speech was certainly defiant, the whiff of electioneering was overpowering.
Brown slammed the City as "ideologically bankrupt" in a speech strewn with rhetoric designed to appeal to Middle England and mobilise core support. His assertion that the credit crisis was a failure of rightwing Conservative ideology certainly left a bitter taste in the mouth. He claimed that "what let the world down" was "the Conservative idea that markets always self-correct but never self-destruct". He then blamed the "right-wing fundamentalism that says you just leave everything to the market and says that free markets should not just be free but values-free".
This element of his speech was, at best, what Hollywood might term a 're-imagining' of the current financial predicament and, at worst, a distortion of the truth. It takes a unique kind of amnesia to completely neglect "his own 10-year record as chancellor – when he championed City interests". After all, Brown is a man who had previously spent years advocating and championing a 'light touch' regulatory system and the notion that the market is a more efficient allocator of capital than the state. Robert Peston snappily articulated this state of affairs in his blog today – "Brown snubs Brown". He outlined that whilst the PM's comments were intended as an attack on the Tories, they really just "put the boot into the Brown years at Number 11".
To be fair, lots of people felt exactly the same way about the City during the economic boom, but for a PM who has demanded financial accountability, previously called for an end of the "age of irresponsibility", and even written a book looking at courage, he has probably emerged from this in a less than heroic light. That said, Sarah Brown felt otherwise as she exclaimed "My husband. My hero!"
A more profitable line of argument for the PM, and one which he developed in yesterday's speech, may be to attack the Conservatives over their lack of economic credibility. As today's Independent points out, "the Prime Minister did have a strong case to make about the hesitant and confused manner in which the Tories reacted to last year's global financial meltdown". In pursuing this line, he would, at least, put the onus back on David Cameron to explain how the Conservatives' calls over recent years for even-lighter-touch financial regulation would have helped to avert the crisis.
JS
Thursday, September 24, 2009
"I'm not afraid of death. I just don't want to be there when it happens."
Woody Allen can be relied on to reflect the concerns of many of us when it comes to death. He also said "I don't want to achieve immortality through my work. I want to achieve it by not dying."
According to claims made by American scientist Raymond_Kurzweil, 73-year old Mr Allen may yet just about get his wish. Writing in The Sun today, Mr Kurzweil (who, it should be noted, has a book to flog) suggests that the pace of developments in nanotechnology could mean man becoming immortal within 20 years.
This raises all kinds of intriguing questions – medical, philosophical and otherwise. On the face of it, you'd have to see this as a good news story – no more deaths from cancer or heart disease or whatever. But there are downsides. As Bryony Gordon writes in today's Telegraph, "I'm not convinced that I want to live forever. After all, how do you feel alive when you know that you're never going to die?"
And goodness only knows how Mr Kurzweil's prediction will impact on the pensions and insurance industries. Actuaries, pension managers and insurance providers have struggled with the implications of life expectancy increasing at the rate of two years every decade in the UK, let alone the concept of death becoming obsolete. What happens to everyone in the pensions and insurance industries if no-one dies? I suppose at least we'll all have plenty of time to re-train.
AF
According to claims made by American scientist Raymond_Kurzweil, 73-year old Mr Allen may yet just about get his wish. Writing in The Sun today, Mr Kurzweil (who, it should be noted, has a book to flog) suggests that the pace of developments in nanotechnology could mean man becoming immortal within 20 years.
This raises all kinds of intriguing questions – medical, philosophical and otherwise. On the face of it, you'd have to see this as a good news story – no more deaths from cancer or heart disease or whatever. But there are downsides. As Bryony Gordon writes in today's Telegraph, "I'm not convinced that I want to live forever. After all, how do you feel alive when you know that you're never going to die?"
And goodness only knows how Mr Kurzweil's prediction will impact on the pensions and insurance industries. Actuaries, pension managers and insurance providers have struggled with the implications of life expectancy increasing at the rate of two years every decade in the UK, let alone the concept of death becoming obsolete. What happens to everyone in the pensions and insurance industries if no-one dies? I suppose at least we'll all have plenty of time to re-train.
AF
Friday, August 14, 2009
DB or not DB? That isn't the question
No great surprises in yesterday's report from KPMG, on the funding position of the top UK DB pension schemes, but interesting that they feel the "tipping point" has been reached, at which schemes are paying out more on retired scheme members' benefits than on current members' benefits. What's more, 22% of the top DB schemes "face no prospect of clearing pension deficits from discretionary cashflow over any reasonable time period" – a sobering thought given that cashflows are unlikely to improve in the foreseeable future.
The findings echo the views of senior figures in the pensions and investment industries revealed in a Penrose survey earlier this week, of whom 94% thought private sector DB schemes are "unsustainable" and would close to existing members for future accruals in the next couple of years.
With DB schemes seemingly being closed on a "weekly basis", the end of DB provision in the private sector looks to have been factored in by most commentators as pretty much a fait accompli. The debate instead is moving towards what will replace DB schemes. Here the picture is much less clear cut. Many fear employers will revert to DC schemes with contributions levelled down to the minimum prescribed under the Personal Accounts system. Others, such as Adrian Waddingham interviewed in FTfm this week, feel some will bring in some form of hybrid scheme, comprising elements of DB and DC.
The real "tipping point" in all this has more to do with the shift in the balance of risk between the employer and the individual. It's about the labour market and life expectancy. During the post-war period, when many of the DB schemes now facing closure were originally set up, there was a shortage of labour, so employers introduced final salary pensions as a way of attracting workers. Life expectancy for the average UK male was somewhere in the low seventies, so the cost of providing this benefit to people retiring at 65 was relatively low. Nowadays, with unemployment at 2.4 million and rising, employers don't need to go to such generous lengths to attract staff. And with life expectancy in the mid-eighties (and also rising), but retirement age still 65, the cost to employers is significantly greater. To put simply, if a trifle brutally: in 2009 can any rational employer justify offering a DB pension as an employee benefit? The answer, sadly, seems to be a resounding "No".
CM
The findings echo the views of senior figures in the pensions and investment industries revealed in a Penrose survey earlier this week, of whom 94% thought private sector DB schemes are "unsustainable" and would close to existing members for future accruals in the next couple of years.
With DB schemes seemingly being closed on a "weekly basis", the end of DB provision in the private sector looks to have been factored in by most commentators as pretty much a fait accompli. The debate instead is moving towards what will replace DB schemes. Here the picture is much less clear cut. Many fear employers will revert to DC schemes with contributions levelled down to the minimum prescribed under the Personal Accounts system. Others, such as Adrian Waddingham interviewed in FTfm this week, feel some will bring in some form of hybrid scheme, comprising elements of DB and DC.
The real "tipping point" in all this has more to do with the shift in the balance of risk between the employer and the individual. It's about the labour market and life expectancy. During the post-war period, when many of the DB schemes now facing closure were originally set up, there was a shortage of labour, so employers introduced final salary pensions as a way of attracting workers. Life expectancy for the average UK male was somewhere in the low seventies, so the cost of providing this benefit to people retiring at 65 was relatively low. Nowadays, with unemployment at 2.4 million and rising, employers don't need to go to such generous lengths to attract staff. And with life expectancy in the mid-eighties (and also rising), but retirement age still 65, the cost to employers is significantly greater. To put simply, if a trifle brutally: in 2009 can any rational employer justify offering a DB pension as an employee benefit? The answer, sadly, seems to be a resounding "No".
CM
Wednesday, August 12, 2009
Back to the bad old days?
Today's UK unemployment figures make for grim reading. Nearly two and a half million Britons are out of work, the highest figure since the mid nineties, accounting for 7.8% of the workforce. What's more, the data emerges amidst dire warnings of continuing deterioration in the jobs market into 2010 and beyond.
For those of us old enough to remember the 1980's, when unemployment was well over 3 million, one of the striking differences between then and now is the relative scarcity of cultural references to the jobless. Where is today's television equivalent of Alan Bleasdale's Boys_from_the_Blackstuff? Who is recording the noughties versions of The Specials' Ghost Town or UB40's One in Ten? (Admittedly "One in Twelve point Eight" doesn't scan well, but you get my drift.)
Perhaps the cultural references will follow in due course, as the full impact of rising unemployment hits home. But a couple of other explanations occur to me. One is that however frightening redundancy is today, the modern labour market has changed beyond recognition in the last 25 years. Unemployment induced such despair in the 1980s because it affected millions of men (and it was mainly men) in traditional manufacturing industries who had assumed they were in jobs for life and saw no realistic alternative once those jobs disappeared. These days, there can be few people labouring (pardon the pun) under such illusions. Redundancy is still a nasty shock, but not necessarily a cause of despair.
It also occurs to me that some of the generation which grew up watching such TV programmes and listening to those records are now in senior enough positions to affect decisions about redundancy. They may be more inclined to look at freezing or cutting pay, or introducing part-time working as "least worst" alternatives to cutting jobs. Measures like these offer cold comfort to struggling families, of course. But it would be reassuring to think that the lasting impact of the work of Bleasdale and his contemporaries may have played some role in softening the impact of unemployment on today's workers.
AF
For those of us old enough to remember the 1980's, when unemployment was well over 3 million, one of the striking differences between then and now is the relative scarcity of cultural references to the jobless. Where is today's television equivalent of Alan Bleasdale's Boys_from_the_Blackstuff? Who is recording the noughties versions of The Specials' Ghost Town or UB40's One in Ten? (Admittedly "One in Twelve point Eight" doesn't scan well, but you get my drift.)
Perhaps the cultural references will follow in due course, as the full impact of rising unemployment hits home. But a couple of other explanations occur to me. One is that however frightening redundancy is today, the modern labour market has changed beyond recognition in the last 25 years. Unemployment induced such despair in the 1980s because it affected millions of men (and it was mainly men) in traditional manufacturing industries who had assumed they were in jobs for life and saw no realistic alternative once those jobs disappeared. These days, there can be few people labouring (pardon the pun) under such illusions. Redundancy is still a nasty shock, but not necessarily a cause of despair.
It also occurs to me that some of the generation which grew up watching such TV programmes and listening to those records are now in senior enough positions to affect decisions about redundancy. They may be more inclined to look at freezing or cutting pay, or introducing part-time working as "least worst" alternatives to cutting jobs. Measures like these offer cold comfort to struggling families, of course. But it would be reassuring to think that the lasting impact of the work of Bleasdale and his contemporaries may have played some role in softening the impact of unemployment on today's workers.
AF
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