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Royal prerogative

A radio phone-in on pensions provoked much response from listeners

Victoria Derbyshire’s phone-in show on Five Live last week took pensions as its topic, not for the first time. The show’s producers know it is a subject which no longer draws a blank public response. In fact, it is guaranteed to bring in loads of calls.

The immediate prompt was the news that the Government was putting together a support package worth 1.75bn pounds for Royal Mail. Much of that will be set aside to support Royal Mail’s ailing pension fund, where the deficit has grown to 5.3bn in the last three years.

The Department of Trade and Industry’s press release billed it as a 1.75bn package of financial help. As usual, a few caveats applied when you got into the detail. Around 850m was in the shape of money from Royal Mail’s reserves.

If you believe that Royal Mail’s reserves are Royal Mail’s money rather than the Treasury’s, then the taxpayer is not giving anything there. All the Government is doing is allowing Royal Mail to put the money into an escrow account where it will be earmarked, in the unlikely event that Royal Mail ever goes bust, to shore up the finances of the pension scheme.

The other 900m is in the form of a loan from the Government “on commercial terms”. But much of that 900m is not new money. In fact, the only new money from the Government appears to be an unquantified promise that the taxpayer, and not Royal Mail’s reserves, will fund the loss-making network of Post Offices.

The fact that it looks initially like a big package of new financial support – but is not really – helps with one potentially thorny issue. Under EU rules, it is illegal for a member state to subsidise its enterprises, especially if they are in competition with rival European operators, as Royal Mail is. (That is not to say that it never happens.)

What emerged from the phone-in was how passionate the subject of pensions has become, in spite of a huge amount of confusion. Some callers were wrongly under the impression that the taxpayer is throwing huge amounts of money at public-sector pension schemes while private schemes are left to die.

“Look at the teachers,” some of them said. “They have just been allowed to go on retiring at 60 instead of 65 like the rest of us. Look at the civil servants or the other public-sector pension schemes where they are ready to strike over their right to retire at 60 or less.”

One poor man who had been forced to retire early thought the whole pension system was a con. His pension paid out just 465 a month, even though as a capital sum it was worth more than 160,000.

Another ranted at Chancellor Gordon Brown, accusing him of causing the black holes in company pension schemes with his decision to withdraw the tax credits on dividends paid by companies to the pension funds which invest in them. I tried to put it in perspective but he interrupted.

“Are you telling me that taking 5bn to 6bn off the pension funds a year hasn’t made any difference?” he asked. I tried to explain that it will have made some difference but that 5bn to 6bn does not amount to much when company pensions hold assets worth hundreds of billions of poungs – in fact, it is less than 1 per cent of pension fund assets.

What really caused the black holes in pension funds was, first, the fall in the value of the investments and, second, the fact that their liabilities have been going up because actuaries are now factoring in the fact that we live for longer and, therefore, pensions have to be paid out for longer. He was not convinced.

What is really instructive about Royal Mail’s recent pension fund valuation is that its black hole has grown sharply, even though share prices are much higher than three years ago. Any replenishment of its assets through higher share prices has been more than cancelled out by the adoption of more realistic numbers on life expectancy by the actuaries.

The fact that there is such passion about pensions has to be a good thing for the chances of positive reform. The public has become much better informed about it than in the past but I do not envy IFAs the task of spelling it out to individual clients in pounds and pence.

Money Marketing50 Poland Street, London W1F 7AX

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