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Social Care crisis – Four Seasons the latest casualty

10 December 2017

  • Social care crisis deepens as Four Seasons healthcare drowns in debt
  • Debt burdens, rising staff costs, post-referendum nursing shortages and falling council payments have undermined Britain’s social care system
  • Regulator has demanded Four Seasons agreement in 48 hours but crisis remains
  • Hedge funds playing financial football while fate of elderly care home residents hangs on debt restructurings

Four Seasons teetering on the brink as care crisis deepens: In 2016, the insolvency specialist Opus concluded ‘every part of the adult care system is in crisis’ and predicted at least a quarter of care homes would need financial rescue by 2019. In fact, the problem has hit even sooner than this as Four Seasons, the country’s biggest care homes operator – which looks after 17,000 elderly residents in around 350 care homes and employs 25,000 staff – is on the brink of bankruptcy.

Four Seasons drowning in debt: Its massive borrowings are proving too onerous as the current owners struggle to reach a deal with the hedge funds that own their debts. The whole sector is vulnerable to financial collapse as most of the largest operators have been allowed to rely on debt-fuelled financing.

Rising cost pressures have added to social care operators’ woes: Rising debt costs have been compounded by rising operating costs. Care home providers have had to absorb the rise in the national living wage and pension auto-enrolment costs, while Four Seasons reports that staff shortages in the past year have forced it to hire more agency nurses at much higher cost due to post-Referendum departures of EU staff and lack of new EU applicants coming over.

Local authorities have reduced the amounts they are willing to pay for care home places: At the same time as costs or care provision have been rising, revenue has been hit by squeezed council budgets as local authorities are failing to pay operators enough to cover their costs. Even with £2billion additional Government funding, local authorities in many areas are having to cut provision.

CQC has now stepped in to demand resolution: At last, the care regulator – Care Quality Commission (CQC) – has intervened and demanded a resolution to the Four Seasons problem by Monday 11th December. Hedge fund H-2 owns the majority of Four Seasons debt and is set to take over the company when it fails to meet its £26million December interest payment. However, there is a dispute about some care homes which Terra Firma claims are not part of the creditors’ loans.

Four Seasons has a chequered history of failed financial restructuring: In 2006, Qatari investors Three Delta bought Four Seasons at the height of the UK property boom. After the financial collapse, in 2009 they walked away and handed the business to its lenders with £1.5billion of debt. Thus, Royal Bank of Scotland owned 40% of the company and the lenders carried out a debt for equity swap which halved the debt mountain. In 2011, Southern Cross collapsed under its debts and Four Seasons took over 140 of its care homes, while the remainder were swept into another business, HC-One. In 2012, Guy Hands’ Terra Firma bought Four Seasons for £825million and added more debt to the company. The business is now going back into the hands of its lenders as Four Seasons cannot meet its debt interest payments.

Frail, elderly residents at risk as hedge funds play financial football:  The whole social care system is struggling with debt burdens and the rising cost pressures are destabilising the system. I am pleased that the CQC has stepped in, but these problems have been allowed to build up for over ten years and Government has simply stood by as a disinterested observer. Radical reform of social care is urgently needed and the fate of vulnerable elderly people should not be left in the hands of hedge funds playing financial football with their homes. Care providers fulfil a vital social purpose and closer scrutiny of their financial operating models is long overdue.

Further reforms are needed urgently – not just waiting for a Green Paper next year: The Government has not risen to the challenge of dealing with the social care crisis. The current cohort of over-75s is very small, but once the babyboomers reach that age, the numbers are set to soar. Despite reviews and legislation, nothing has actually changed to ensure a sustainable system for elderly care. Political courage is needed and urgent reforms should include:

  • Integration of health and social care
  • Proper financial plans for public funding of future needs
  • New incentives to help families set aside private funds for future care needs
  • Engage employers in preparing for future care needs
  • A national insurance underpin for care.

December 10, 2017   Leave a comment

Rise in Pensioner Poverty shows triple lock faults

4 December 2017

  • Rise in pensioner poverty deeply concerning
  • Poorest pensioners falling behind because triple lock doesn’t protect Pension Credit
  • More older women in poverty as they have lower state and private pensions than men

Recent reductions in pensioner poverty are going into reverse: Figures released today by the Joseph Rowntree Trust point to a worrying rise in poverty among both children and pensioners. Pensioner poverty has reduced significantly in recent years, but this trend seems to have gone into reverse. Poverty is a particularly pernicious problem for pensioners, since once they are in poverty, they have little prospect of future improvements. Working age poverty is often temporary, as people move back into work and improve their incomes. But the oldest pensioners do not have that option.

Triple lock is not enough to address pensioner poverty: Policymakers have often suggested that the much-vaunted ‘triple lock’ on state pensions, which promises an increase each year in line with earnings, prices or 2.5%, whichever is highest, ensures proper protection for pensioners. This is simply not the case. In fact, the ‘triple lock’ only protects the Basic State Pension (around £122 a week) and the full new State Pension (around £160 a week, but only available to the youngest pensioners). It does not apply to Pension Credit, so it does not protect the poorest pensioners at all.

Pension Credit only increases in line with average earnings, it is not triple locked: Pension Credit is crucial for the oldest and poorest pensioners, but this means-tested benefit is only linked to the rise in average earnings. As earnings have lagged behind the rise in inflation, the poorest pensioners have become relatively poorer.

Pensioner poverty rising again as oldest and poorest pensioners are left out of the triple lock: Before the new State Pension system was introduced, the triple lock was a helpful means of alleviating pensioner poverty, by boosting the Basic State Pension. And even though the Pension Credit is officially only tied to the rise in average earnings, the Government increased Pension Credit by more than this. However, as average earnings have fallen behind rising prices, Pension Credit is now falling behind. In fact, the State Earnings Related Pension and State Second Pension increase in line with prices, so those elements of the state pension are also protected, however the poorest pensioners are only protected by average earnings.

Oldest and poorest pensioners are more likely to be women and those who don’t own their home: The most particular problem of pensioner poverty tends to be for older single women, many of whom lost out in both state and private pensions when they were young and are now losing out on the triple lock in their old age. In addition, the sharp rise in housing costs, such as rents, may be causing problems for those pensioners who do not own their own home.

Government should ensure that the Pension Credit does not fall behind the rest of the economy: The rise in pensioner poverty is a real cause for concern and it is important that the Government does not lull itself into a false sense of security that the triple lock is all that pensioners need. Providing the best protection to the youngest pensioners, while leaving the oldest and poorest unprotected by the triple lock, is surely the wrong way round. A re-evaluation is urgently required as surely civilised countries must protect the poorest and most vulnerable properly.

December 4, 2017   1 Comment

Government facing Lords defeat tomorrow over refusal to protect consumers

23 October 2017

  • Government faces Lords defeat tomorrow over refusal to protect financial consumers
  • Hard to understand why Ministers are resisting changes that have widespread support
  • Policy needs action not words – let’s not miss this opportunity to introduce cold-calling ban

Cross-party amendments to Financial Guidance and Claims Bill call for:

  • Ban on cold-calling for pensions
  • Mandatory guidance for pension savers before transferring money out
  • Breathing space to protect people with huge debts (vital as interest rates set to rise)

The Government faces potential defeat in the House of Lords tomorrow evening if it refuses to agree to cross-party amendments at teh Report Stage of the Financial Guidance and Claims Bill.

Ministers blocking measures to ban cold-calling ban and offer breathing space for debts: Having announced it wants to ban pensions cold-calling and introduce breathing space for people with unmanageable debts to help reschedule their payments, it is hard to understand why Ministers are refusing to agree to introduce the necessary legislation in the Bill now going through Parliament. Yet there is widespread support for this ban, across all political parties, consumers groups and providers.

Government says it won’t legislate for years: The Government has so far resisted all calls for these measures to be included in the Bill. Indeed, it has indicated that any legislation may have to wait until 2020. By that time, millions more people will have been plagued by nuisance calls, will be at risk of scams, and may lose their pensions. If the Government is serious about protecting consumers, then it has the ideal opportunity to act now.

Amendments to the Bill will be debated tomorrow with wide support across the Lords: A group of cross-party Peers has worked hard with the Parliamentary authorities to find ways to include these measures in the Bill. We are all concerned about doing more to protect consumers. The amendments would make a significant difference to the public and would pave the way for the Government to actually fulfil its commitments to ban cold-calling, help vulnerable customers and to allow those with big debts to have more time to receive help to sort out their financial affairs.

Ban Cold calling and use of data obtained by cold calling: One of the amendments will introduce legislation that enables the Government to ban cold-calling for pensions. Currently, it is illegal to cold-call about mortgages, but not about pensions. The proposed measures will make it an offence for anyone to make unsolicited approaches to the public about their pensions and will also ensure that the financial regulators have powers to remove the licence to operate from firms who do the cold-calling, or use data obtained from cold-calls.

Mandatory guidance before transferring money out of pensions: The Amendments will also try to ensure further consumer protection by requiring anyone who wants to transfer money from their pensions to have either independent financial advice or to speak to the free national guidance service. This helps to protect people against scam schemes in which they may be enticed into transferring to, as well as ensuring they understand the risks and implications of transferring money out of their pensions. Currently, the take-up of PensionWise is woefully low and people are moving money out of their pensions without realising the tax penalties they will pay.

Customer protection clause and breathing space: We are also calling for a special duty of care for vulnerable customers who need help with their financial affairs, including a breathing space for people with unmanageable debts, so when they approach the Financial Guidance body for help, their interest payments can be suspended for a short period, giving time to reschedule, rather than risking bankruptcy. Especially as interest rates seem set to rise, such protection is vital.

Combining MAS, TPAS and PensionWise into one free holistic guidance service: The Bill has received little attention so far, but is really important. It will merge the existing Money Advice Service, Pensions Advisory Service and PensionWise into one new body, that will offer holistic financial education, information and guidance under one banner. This will be a national service to provide free financial guidance, information and education to the public, to help them manage their money, savings and pensions.

Aim to improve financial capability and help the public make better financial decisions: Currently, many people do not know where to get to get help. There are numerous free services, but their activities are not ‘joined-up’ and many people are confused or simply do not know about the help available. The idea of improving these services is excellent and the Government should be congratulated for bringing forward this Bill. However it must take the opportunity to make the new system work better for the public.

So sad to have to vote against the Government but I am passionate about protecting consumers: I do not want to vote against the Government, but I came into politics with the aim of improving consumer protection and financial education, ensuring customers were treated more fairly by financial firms. This is something I am passionate about and it saddens me that I have had to join with Opposition parties to try to force such measures through, when it is so clear they are important for protecting the public. It is not good enough for Ministers to make promises, when the legislative chance arises we have to take it. Now is the time and I do hope the Government will listen to reason.

October 23, 2017   Leave a comment

Inter-generational fairness

16 October 2017

  • Don’t punish the old to help the young – panic policy changes have political dangers
  • Let’s focus on policies that are fairer across all age ranges
  • Better to address problems of housing or student debt directly
  • And take the opportunity to prepare for social care costs that will burden younger people

 Don’t repeat Manifesto errors: Today’s newspaper reports of potential Budget measures to please younger voters seem fraught with danger. The suggestion that older people should be punished to provide more money for the young could harbour potentially lethal political damage. The Tories core voters are older people, it would be rash in the extreme to risk alienating them in the coming Budget. The lesson from the Election Manifesto is that punishing the old is not a sensible way to attract younger voters, but is a recipe for losing support of older generations.

Age is not a reliable indicator of wealth, health or ability to pay: Some young people are earning huge sums, some older people are and always have been living on extremely low incomes. Favouring one age group will potentially alienate others.  For example, specially reduced taxes for 20- or 30-somethings will feel unfair to low paid, just-about-managing families in their 40s or 50s.

Housing costs and student debts should be addressed directly: Many of the young are definitely struggling with student debts and also with housing costs (but so are older people). Just cutting taxes for particular age groups will not solve the root causes of the problems. Student debt repayment plans, lowering the 6.1% interest rate and offering shorter university courses would help.

Build more suitable new housing: Britain has not built enough new homes to support its rising population and councils lack sufficient social housing to ensure those who need such accommodation can find it. Also, many older people would like to downsize from a larger family home once children move out, but cannot find attractive new homes to move to. Encouraging more suitable age-appropriate housing, as well as ensuring older people can still access mortgages if they need to, could help housing affordability issues for younger families by increasing supply.

Incentivise institutional assets to invest in social housing: Quantitative Easing has inflated asset prices, including housing, which has also increased rents. The Budget could incentivise institutions to invest in ‘build to rent’ property, at little or no cost to the Exchequer, with time limited availability of landbanks for construction projects of this kind. This could reduce rental costs for old and young and provide better returns than currently available on other assets.

Pensions tax relief reform could offer flat-rate incentives and remove Lifetime Allowance – but now is probably not the time:  Pension incentives of tax relief are extremely complex and poorly understood. In fact, non-taxpayers can receive a 25% bonus on their pension savings, even though they pay no tax, which is a highly progressive measure to help lower earners, who are often younger. People earning over £45,000 receive more than 66% bonus on their pension contributions. This is clearly far more generous than the 25% available for lower earners, but this impact is not determined by age, it depends on your income and is based around the tax system. Reform of tax relief has usually focused on paying the same bonus to everyone, which would boost the incentives and pensions of lower and average earners rather than helping certain age groups. Such a radical change would actually help women more than men, young more than old and low earners rather than higher earners, but would not discriminate by age. A quid pro quo for reducing the taxpayer bonus to higher earners’ pensions could be to remove the illogical lifetime allowance on pension accruals which threaten to punish those whose funds perform particularly well.

Another major inter-generational issue is the crisis in social care:  Currently, younger generations face being burdened by huge costs of elderly care for babyboomers who run out of money by the time they reach their 80s. The Chancellor would be well-advised to introduce measures to encourage older people who do have money in pensions or ISAs or valuable properties, to earmark a specified sum – say £100,000 – that would cover them if they need care. This would be each individual’s maximum contribution towards their care, after which the State would pick up the costs. Incentives to help older people use their pensions or ISAs to build up a later life care fund – by allocating money that could be passed on free of inheritance tax as long as it provided a care fund for the inheritors or withdrawn from pension funds tax-free – would finally start addressing this crisis. Neither Government, nor individuals have set aside any money for care. The longer the Government delays in addressing this issue, the more older people will fail to prepare for the potential costs. Ultimately, National Insurance might help with these societal risks, but there has been a major failure of successive Governments to prepare for the well-known future burden. The costs of care should not be borne wholly by who need it, but every family should contribute to the costs and those lucky enough not to need it will help pay for those who do.

I urge the Chancellor to avoid knee-jerk panic tax changes that could alienate older voters. Let’s focus on policies that are fairer across all age ranges.

October 16, 2017   Leave a comment

Capitalism is the best system, but has it been undermined by QE

28 September 2017

  • Mrs. May is right – capitalism boosts growth and economic progress but she fails to recognise central banks have distorted capital markets with dangerous political consequences
  •  Government bond markets are rigged in favour of the strong at expense of the weak as QE redistributes wealth away from the young and enriches the wealthiest groups
  •  Central Bank policies have operated as disguised fiscal policy without democratic accountability
  •  Socialism is not the answer – that would make everyone poorer – but we need better policy responses to problems of debt and inequality

The Prime Minister is today speaking at the Bank of England to celebrate its 20 years of independence. But she has failed to recognise the irony of trumpeting the virtues of capitalism in the seat of monetary policymaking which has, for the past ten years, undermined many of the principles on which capitalism is based.

In theory, the central bank operates independently of Government, but in practice, its unconventional monetary policies have acted as a democratically unaccountable arm of the Treasury.

It is understandable that, in the face of the 2008 financial crisis, policymakers were looking for new ideas to save the banking system. They used monetary policy as the weapon of choice, on the pretext that there was no alternative and Japanese-style economic conditions must be avoided at all costs. This view prevailed and the side-effects or long-term consequences of so-called ‘Quantitative Easing’ were not really considered.

As an emergency response, one can understand that this policy had appeal. It could be introduced quickly, would boost capital markets and allow Governments to borrow more cheaply. But the transmission mechanisms for economic revival were not carefully monitored, nor were the damaging side-effects considered seriously.

The fact that QE has turned out to be just a fancy name for ‘printing money’ to finance government borrowing has still not been recognised. Instead of the politicians printing the money, as would be the case in many banana republics, this time is was the ‘independent’ central banks. This gave the exercise an air of respectability and the benefits to Government and financial markets were so enormous that it has been adopted around the world.

Normally, markets would punish countries which just created new money to finance their borrowing, but when all major countries are doing this and the policy enriches financial market players and the wealthiest groups, the capital markets have turned a blind eye to the underlying reality and keep pretending that central banks can just ‘unwind’ QE once it wishes to tighten policy again.

Of course, this is simply not credible. But far from worrying about how to deal with the stock of debt on central bank balance sheets, for the past years they have just kept on creating more huge sums to increase their purchases. Even after the economic emergency has passed, the monetary drug continues to be administered. Talk of ‘tapering’ has already caused market dislocations, but don’t forget that this ‘tapering is only creating less new money’, it’s not stopping the policy, let alone reversing it. The Fed has begun to make noises in this direction, but the scale of the task is so enormous, it’s hard to see how anything meaningful could be achieved without causing market mayhem.

And politicians have bought into the QE story completely. Of course they have, because it helps them so much. Without QE, the cost of borrowing to finance current Government spending would be far higher and politicians would have to make difficult decisions (much harder than the ‘austerity’ that has been so vilified here). They would have to cut spending further, or raise taxes or keep borrowing ever more until the markets lose confidence.

But the truth is that central banks have become an arm of fiscal policy. Buy buying so much sovereign debt, they have allowed policymakers to believe they can afford more spending and lower taxes. The longer QE persists, the deeper the hole is being dug in public finances and the harder it will be to climb out.

But the difficult decisions cannot be ducked for ever. I believe the fallout from the unconventional monetary policies is having political consequences which are now causing a loss of confidence in our entire capitalist system.

Ordinary people have not perceived much benefit from QE. Yet they have seen how it has enriched wealthy groups, boosted asset markets and helped the financial sector. Meanwhile, they have felt the pain of rising rents and house prices, students have been saddled with mounting debts that don’t reflect current low rates, younger workers have been shut out of final salary-type pensions as QE has made them increasingly unaffordable.

Recent political events demonstrate disaffection with conventional politics. The votes for Brexit, Trump, Macron and far-right nationalists in Germany and other EU countries have been a shock to the established order. I think one could argue that the sudden surge in populism represents a loss of confidence in capitalism, economic policy and democracy.

Britain is suddenly engaged in a battle between the hard left and the hard right. It is also facing a hard Brexit. There are no easy choices, but leaving the EU when there is the real threat of Marxist expropriation of private assets and punitive taxes on wealth creation would further damage future generations.

I suggest that unconventional monetary policies may have played a role in the rise of populism and voters’ desire for change. So far, such potential impacts have been ignored. Yet, the side effects of Quantitative Easing (QE), especially after so long, may be feeding popular disaffection with the entire capitalist system. Mrs. May has not recognised this yet, but it would be advisable to consider it.

Capitalism assumes free flows of capital and market forces, to allocate resources and determine outcomes. But global monetary policy has interfered with capitalism as central banks have artificially distorted capital markets, possibly undermining the basis on which the system depends.

QE was introduced as a supposedly temporary emergency experiment to revive growth by lowering long-term interest rates once short rates were approaching zero. Buying sovereign debt with newly-created money pushed up bond prices thus lowering yields. Initially, savers were told they should be grateful for a return ‘of’ their capital, rather than expecting a return ‘on’ their capital. I believe there were alternatives to QE – for example if the Government had decided to take RBS (and possibly Lloyds) into national ownership on a temporary basis, it would have ensured shareholders lost out in the way capitalism intended, rather than being paid by the Government for shares that were effectively worthless. I know this may sound heretical, but it is a sounder capitalist solution than QE has turned out to be. It would also have helped shore up the prudence of the banking sector, when shareholders realise they can lose everything if they allow companies to operate so irresponsibly.

Once in public ownership, these huge commercial banks could have used their nationwide networks and branches to ensure lending reached small businesses across the country and could have been managed by keeping bank staff on, rather than by civil servants. The aim would be to sell the banks back into the market once the economic emergency was over (as it has been for several years) and better protections had been put in place to avoid a repeat of the reckless lending that caused the crisis.

That is of course with the benefit of hindsight, but I was saying this at the time. However the attractions of QE were much greater and Labour was frightened of nationalisation, having spent so many years trying to overcome their leftist image. It is ironic that the fallout from fears of nationalisation has been partially to boost the rise of extreme left Labour. These policies have been roundly discredited in the past and Venezuela is a more recent example of the economic failure of extreme left economics. But with so much anger and disaffection at the status quo, more radical ideas are required.

The Tories really need to confront the problems facing our nation with a better understanding of what has gone wrong. And when will they admit that a ‘no deal’ Brexit would compound the economic catastrophe that seems to be looming.

With or without Brexit, the perils of monetary policy should be recognised. It seems that the drug is so powerful for strong groups that they cannot bear to give it up. But the short-term ‘fixes’ are storing up more problems as time goes on.

The problem for capitalism is that Government bonds are supposed to be ‘risk-free’ assets. As the lowest risk asset class, other capital markets – and models of capital market pricing – use this benchmark. QE has distorted this ‘risk-free’ rate. With a buyer determined to boost the price of these assets, it is no longer a free market. And when bond yields fall sharply, investors need to find other sources of return, which pushes up all other asset prices. Asset prices across most markets have soared.

And the policy has been maintained well beyond the economic emergency. Despite rising growth and employment, global central banks have continued creating more money to buy more and more bonds, thereby artificially distorting capital markets even further for almost ten years. This has benefitted powerful interest groups, which may explain why the policy has been prolonged, but it has also disadvantaged others. With 90% of ordinary people’s savings being in cash or cash-like instruments, most people felt the pain or QE as saving rates plunged, while the wealthiest 10% have benefited enormously from rising asset markets in which they hold much of their wealth.

Artificially boosted asset price increases have negative effects on society, because assets are unevenly distributed. The top 5% of households own nearly half of UK assets and 80% of all assets are owned by the over-45s. So, the wealthiest and older households have become even wealthier, while QE-induced house price rises lead to higher rents, which have further disadvantaged non-homeowners and the young. Such social and distributional side-effects of unconventional monetary policies are under-recognised, perhaps because the policy is so beneficial to Governments, but politicians would do well to consider the potentially damaging political consequences.

In effect, monetary policy has acted like regressive fiscal policy. If politicians announced tax changes to enrich the wealthiest groups and redistribute money away from younger and less wealthy people, there would be a voter backlash. But disguising such fiscal measures as monetary policy has achieved similar impacts without democratic accountability.

The powerful groups who benefit most from QE – governments, financial market participants and the wealthiest – have so far held sway, but it is important to consider the democratic dangers to capitalism which prolonged QE may pose.

Such ongoing redistribution may at least partly explain disaffection with the ‘establishment’ and rise of populism. Many voters have started to realise that something is not quite right, that the economy is not really working well for them, but are not sure why. So they vote for change, anyone that promises different ideas.

Politicians may have started to feel the consequences of such disaffection. But what can they do about it? Asset bubbles have been inflated in many areas, debt levels have risen and consumers are over-extended. Perhaps a dose of ‘people’s QE’ or debt write-off will be needed in years to come.

September 28, 2017   2 Comments

Government too complacent on final salary schemes

27 September 2017

  • Three million pension scheme members have no more than 50/50 chance of getting their pensions
  • ‘Superfunds’ could ease pension pressures before more employers become insolvent
  • As Brexit economic and political uncertainty worsens, final salary pensions are more at risk

No room for complacency as closed schemes will need better ways to manage liabilities: Britain’s Defined Benefit (DB) final-salary type pension schemes are under unprecedented pressure. So far, the Government has been rather complacent about the risks, but with the ongoing ultra-low interest rate environment and rising economic and political uncertainty, new thinking is urgently needed.

Millions of members at risk: The PPF estimates 3 million people have no more than a 50% chance of getting their promised benefits, while three quarters of sponsors are facing significant challenges in running their schemes.

Deficits have stuck at £400bn for past ten years, despite £120bn employer contributions: Despite ploughing £120billion into DB schemes to improve funding, the aggregate DB deficits have stayed around £400billion for the past ten years. Employers have been running to stand still and the hoped-for funding improvements have generally remained elusive.

As most schemes are closed, sponsors will soon be desperate to get rid of legacy liabilities: With the majority of schemes now closed, within the next 5-10 years, these sponsors will have no interest in or worker connection with the scheme. 90% of FTSE350 schemes are expected to become cash-flow negative in the next 5 years. Sponsors will look for ways to get rid of this legacy risk, or will go bust, especially if the economy weakens. The Government must plan ahead for this now.

Not enough flexibility – making the best the enemy of the good: Many companies would like to honour their obligations, but in an affordable way. However, the options for employers and members are binary. Employers who can continue in business, must purchase annuities for full benefits before severing links to the scheme. This is prohibitively expensive, especially in the current interest rate environment and it is questionable whether excessively expensive annuitisation is a sensible use of corporate resources.

Pensions can’t be reduced unless sponsor going bust: Quite rightly, employers cannot walk away from their schemes. But once employers are facing inevitable insolvency, benefits are reduced by around 10-20% in the PPF. There is no flexibility for companies which struggle on in business.

BHS and Tata may provide a blueprint for companies which are managing to keep afloat to ‘wind-down’ rather than having to ‘wind-up’: BHS and Tata schemes, however, have been allowed a different option. Their trustees are running their schemes with the aim of paying benefits better than PPF, based on assumed prudent future investment returns, without annuitising. BHS and Tata sponsors paid a premium over the expected future cost of the promised pensions and trustees will aim to deliver promised benefits over time. Using this as a precedent, one can suggest a new option to allow employers to meet their obligations at more affordable costs, without insolvency and without annuities. This is rather like allowing the schemes to wind-down, rather than winding-up and be a model for other schemes.

‘Superfunds’ could help with consolidation: PLSA proposals for ‘Superfunds’ could be helpful in achieving this aim, because pooling schemes will allow reduced costs of delivering the pensions. And allowing employers to rely on future investment returns as well, rather than annuitising, will help remove pension risk from their balance sheet and free them to focus more resources on their business, or improving pension contributions for other workers.

Members have better chance of receiving higher pensions: By offering sponsors a viable alternative to unaffordable buyout, members would have better chances of receiving full benefits, rather than reduced PPF pensions. The idea would be that employers must pay in enough money to meet expected future pension payments, with assumed investment returns over time, plus a capital buffer (perhaps an extra 5-10%). This would be much less than the cost of buyout but would still be expected to deliver full pensions to all members.

Pooling can reduce costs and improve expected investment returns: By joining thousands of small pension schemes together into much larger Superfunds, administration costs would fall. The Regulator estimates average per member costs of administration and advice for schemes with over 5000 members is £87, while for schemes with under 100 members it is £653. Superfunds should also improve investment returns, risk management and governance. Large pools of assets can achieve better diversification and access higher quality fund management, with a larger and broader spread of asset classes.

Superfunds could benefit the economy as more assets invest in infrastructure or social housing: Not only could Superfunds reduce costs of administration, external advisers, legal and accountancy fees, but they would also allow more pension assets to be used to fund infrastructure, social housing or other long-term much needed investments.

Employers could raise one-off loans to pay the pension debt and avoid future profit drain: The employer could perhaps take out a loan to meet the required additional funding of the consolidation scheme, cleaning up its balance sheet and without the same drain on future profits because the debt would be a one-off capital transaction. Once the extra funds were put in, the employer would have no residual liability for members’ pensions.

Standardising benefits could halve admin costs: In order to achieve the necessary cost reductions, it would certainly also help to standardise and simplify benefits. It is estimated that administration costs could be reduced by over 50% if benefits were streamlined.

Win-win for members, employers, economy and younger generations: Such a reform would be a win-win for employers (who can get rid of pension risk more affordably), for members (who would have more chance of getting full pensions) and for the economy (as more money could invest in public or higher return projects) and for younger generations (if employers have more resources to devote to their pensions, rather than buying out members of closed schemes).

September 27, 2017   Leave a comment

Loss of confidence in capitalism, economic policy and democracy

25 September 2017

Based on my letter published in the Financial Times 22 September.

Recent political events demonstrate disaffection with conventional politics. The votes for Brexit, Trump, Macron and far-right nationalists in Germany and other EU countries have been a shock to the established order. Questions are asked as to whether the sudden surge in populism represents a loss of confidence in capitalism, economic policy and democracy.

Unconventional monetary policies may have played a role in the rise of populism and voters’ desire for change. So far, such possible impacts seem to have been overlooked. Yes, it is possible that the side effects of Quantitative Easing (QE), especially after so long, may be feeding popular disaffection with the entire capitalist system.

Capitalism depends on free flows of capital and market forces, to allocate resources and determine outcomes. The stance of global monetary policy has, arguably, undermined capitalism as central banks have artificially distorted capital markets, the basis on which the system depends.

Following the 2008 financial crisis, central banks introduced QE as a supposedly temporary emergency experiment. Having pushed short-term interest rates down to almost zero, they wanted further stimulus to revive growth. So they decided it might help if they could lower long-term interest rates too. They, therefore, created huge amounts of new money to buy sovereign debt (and other bonds), which pushed up bond prices thus lowering yields.

However, Government bonds are considered ‘risk-free’. As the lowest risk assets, other capital markets – and models of capital market pricing – use this benchmark. Unfortunately, however, QE has distorted this ‘risk-free’ rate, undermining its valuation. With a buyer determined to boost the price of these assets, it is no longer a free market. And when bond yields fall sharply, investors need to find other sources of return, which pushes up all other asset prices.

And the policy has been prolonged well beyond the economic emergency. Global central banks have artificially distorted capital markets for several years, by continually creating more money to buy more and more bonds. This has been very beneficial for powerful interest groups, but has also disadvantaged others.

QE helps Governments borrow more cheaply, thus lowering their fiscal deficits and allowing higher public expenditure. Financial market participants and the wealthiest groups in society benefit from the overall increase in asset prices that QE engenders. But the social, distributional – and political – side-effects of unconventional monetary policies are overlooked.

However, the side-effects of unconventional monetary policies may have fed populism and ultimately undermined confidence in democracy.

QE artificially boosts asset prices but assets are unevenly distributed. 80% of all assets are owned by the over-45s, , the wealthiest and older households become even wealthier, while QE-induced house price inflation and rent increases have further disadvantaged non-homeowners and the young. Such social, distributional – and political – side-effects of unconventional monetary policies are routinely overlooked.

If politicians announced tax changes to enrich the wealthiest groups and redistribute away from young to old there would be a voter backlash. But disguising such fiscal measures as monetary policy has achieved similar impacts without democratic accountability.

Is the populist wave engulfing the West reflecting this? The powerful groups who benefit most from QE – governments, financial market participants and the wealthiest – have so far held sway, but it is important to consider the democratic dangers to capitalism which prolonged QE may pose.

September 25, 2017   Leave a comment

One pension provider looking after low earners

13 September 2017

  • Government failing to recognise problem of low earners losing out in auto-enrolment
  • Companies using Net Pay schemes are not treating low earners fairly
  • Many low paid women are being forced to pay 25% more than they should for their pension
  • One pension provider is taking the moral high ground – Now:Pensions is paying these workers their tax relief

I am delighted to see that Now:Pensions has confirmed it will give its low-paid customers the tax relief that is denied to them by current Treasury rules. The company is going to pay the tax relief that these low earners should be entitled to, but which the Government is denying them.

Any worker earning under £11,000 last year was entitled to 20% tax relief (which amounts to a 25% Government bonus) on their pension contributions.  If their pension scheme operates on a Relief at Source basis they will have received the money. But if the pension provider chosen by their employer is administered on a Net Pay basis, then these low earners, mostly women, cannot get the 25% top-up. So many women and other low earners are forced to pay 25% more for their pension than they should.

This scandal has been going on for a long time, but the Government has failed to address it.

It is good to see one company taking the moral high ground.  Now:Pensions is a NetPay scheme, but it has chosen to give the extra money to its low earning customers from its own pocket. None of the other Net Pay schemes has been willing to ensure low earners do not lose out.

Ideally, the Treasury needs to allow low earners to claim the tax relief they are entitled to. As auto-enrolment pension contributions are set to quadruple by 2019, the amount of money these low earners lose out on will increase sharply and more women will be denied the Government help they should have. This scandal needs to be urgently addressed and I hope the Treasury will take the matter more seriously as most of these low earners will be women, who are far more at risk of inadequate pensions than men.

In the meantime it is good to see at least one company making a stand to improve women’s pensions and treat low earners fairly.

September 13, 2017   Leave a comment

Finally, a ban on pensions cold calling

20 August 2017


  • Great to see DWP will act, not just keep consulting
  • Protecting people’s pensions from fraudsters is so important
  • Can give clear message to the public that anyone who contacts them out of the blue about their pensions is a criminal
  • This issue has clear cross-party and industry support

Banning cold calls and tightening protection against transfers to fraud schemes: The Government has bowed to the overwhelming pressure from politicians in all parties, consumer groups and the pensions industry to urgently introduce a ban on pensions cold calling. This is great news. It is also going to toughen rules on transfers out of occupational schemes and tighten HMRC requirements that will make it much more difficult to set up fraudulent schemes.

The case for banning unsolicited approaches seems clear and unequivocal: Currently, any scam company can buy a list of ‘prospects’ and contact them out of the blue to offer them a free pension review that leads to them losing their entire pension in a fraudulent scheme. Cold calling for mortgages was banned years ago and the public needs the same protection for other financial matters. People can only be approached about a mortgage if they have expressly requested contact from the company by name. Just ticking a generic box about financial promotions would not make the approach legal. Doing the same for pensions would be a significant step forward in protecting the public

Banning unsolicited approaches means we can send clear message to the public – JUST HANG UP! No reputable company should need to contact people out of the blue – they can find better ways to generate business. A ban would send a strong signal to the public that if someone contacts them out of the blue to discuss their pension, they should ‘Just Hang Up’. If they receive unsolicited texts or emails, ‘just delete them’. Anyone who does this will be a criminal. Even that friendly person offering a free review will not have your interests at heart. A ban would make the situation clear.

Public needs to be better protected: Since 2014, people have been scammed out of £43million of pensions and just in the first five months of this year they have lost £5million to fraudsters. This is money people need for their retirement and the scams nearly always start with a cold call. Government initiatives so far have not worked. Measures to impose Caller Line Identification and campaigns such as ‘Scorpion’ and ‘Project Bloom’ are not protecting people enough. ‘Action Fraud’ figures show over 2000 frauds reported since 2014, but only 7 suspects have been summonsed or charged and no convictions.

Pension freedoms give people more flexibility but also mean they need better protection: The new pension rules ensure people can use their pensions more freely, but this also increases the risks they face and leaves more people in need of guidance. It is right to give people more flexibility and choice over their pension savings, but the Government is right to ensure that it also increases protection against fraudulent unsolicited approaches.

Government will also tighten rules to stop set up or transfer to fraud schemes: It is also welcome news that the Government intends to tighten HMRC rules that will make it harder to establish fraudulent schemes and also toughen rules on transferring pensions from one scheme to another. Only companies who produce regular accounts will be approved as pension schemes and trustees of occupational pensions will be required to check that receiving schemes are regulated by the FCA, or are authorised as MasterTrusts or have a clear employment link.

Public should always check with PensionWise: Some scammers have masqueraded as a ‘Government approved’ review service. Individuals may have heard that the Government has indeed set up a free guidance service, called PensionWise, but it is vital to let people know that PensionWise will NEVER cold call you or contact you without you approaching them first. So the clear message to the public is that you should always contact PensionWise or your independent financial adviser before reviewing or making decisions about your pension.

The sooner the Government acts, the sooner we can improve protection for people’s pensions: We will never stop such fraudsters completely, but these measures will certainly protect the public better – about time too.

August 20, 2017   Leave a comment

Banning cold calling

4 July 2017

  • Government needs to urgently ban cold calling not just keep consulting
  • Clear support across political parties and pensions firms for a ban
  • Protecting the public from fraudsters needs higher priority
  • Cold call ban could make it clear for the public that reputable firms will not approach them unless they have specifically asked 

The Government is about to issue yet another consultation on banning pensions cold calling – asking yet more questions about protecting the public, rather than just getting on with it.

The case for banning unsolicited approaches seems clear and unequivocal:  Cold calling for mortgages was banned years ago and the public needs the same protection for other financial matters. To offer someone a mortgage, they must explicitly request to hear from your firm. But any scam company can buy a list of ‘prospects’ and contact them out of the blue to offer them a free pension review that leads to them losing their entire pension in a fraudulent scheme.

Public need to be better protected : With the pension freedoms giving people better access to their pensions, the opportunity for scams has increased. It is right to give people more flexibility and choice over their pension savings, but it is also vital that alongside this, the Government does more to effectively protect them against the rising number of fraudulent unsolicited approaches.

Official figures show fraudsters not being caught: In answer to my written Parliamentary Questions last year, the Government’s replies indicated current protective mechanisms are not working adequately. Data from ‘Action Fraud’ (the national centre for fraud and cybercrime) and its National Fraud Intelligence Bureau showed that over two thousand frauds had been reported since 2014, but only 7 suspects have been summonsed or charged in connection with these and no convictions.

Government relying on Action Fraud is not enough: When asked why mortgage cold calling can be banned but not pensions, showed insufficient concern for protecting the public. Its reasons included suggesting it wanted to wait and see whether Caller Line Identification measures would work, but just knowing the phone number of a cold caller is no protection against a scam. The Government’s replies also claim that Action Fraud ensures the public ‘has the information they need to protect themselves from telephone fraud. Action Fraud, for example places an alert on its website when a serious threat or new type of fraud is identified – which members of the public can sign up to receive by email’. This is clearly not much of a protection for the public, especially as many older people are not even on line and would not know to ask for information until after they had been scammed!

More concern for companies than the public: The replies said ‘We are determined to tackle the scourge of nuisance calls especially those of a fraudulent nature. Our efforts are focused on taking action against companies that are deliberating breaking the rules, rather than penalising legitimate businesses who comply with the law.’ But no reputable company should need to contact the public out of the blue – they can find better ways to generate business.

Let’s not miss another opportunity to get cold calling banned: Having missed the chance to do this when the Pensions Act went through Parliament last year, let’s take this new opportunity to finally put in place much needed measures to protect people’s money from fraudulent firms. As the Financial Guidance and Claims Bill is passing through Parliament now, there was strong support across the House for banning cold calling by Claims Management Companies, and for pensions too.

It is important for people to know that no reputable firm will cold call about their pension. A ban would send a strong signal to the public that if someone contacts them out of the blue to discuss their pension, they should ‘Just Hang Up’. If they receive unsolicited texts or emails, ‘just delete them’. The friendly person offering a free review will probably be out to take their money and will not have their interests at heart. A ban would make the situation clear. When it comes to mortgages, customers can only be approached if they have expressly requested contact from the company by name. Just ticking a generic box about financial promotions would not make the approach legal. Doing the same for other financial transactions would be an enormous step forward in protecting the public.

Public should always check with PensionWise:  In the meantime, there are not many effective ways of informing the public. One piece of advice would be to always check with PensionWise or an adviser before handing over pension money to a firm they don’t know. The best advice is to ignore any approaches that come out of the blue, so they don’t fall for such scams.

Act now: If the Government really is serious about protecting the public and stopping more scams, then it could seize the opportunity offered by the legislation to act, rather than endlessly consulting while unsuspecting people lose more money. I will be laying amendments to the Bill to try to get this enacted more quickly. There is no other obvious legislative vehicle in the Queen’s Speech that would enable a ban to be introduced in the next two years and as Brexit legislation will dominate, this Bill is an ideal opportunity to finally act.

Here are links to some of the questions I have asked and the responses provided

August 4, 2017   Leave a comment