Though we’ve seen massive improvements in corporate accounting standards over the last 15 or 20 years, one organisation consistently fails to adopt prudent methods: the government.
I’m not talking about how it goes about managing (spending!) our money. I’m talking about how it constantly manages to be negligent in accounting for it.
Take this piece of news today. According to The Sunday Times, the government is poised to receive a remarkable £28bn windfall as a result of a state takeover of the Royal Mail pension fund.
Under this windfall, the liabilities of some 300,000 Royal Mail pensioners will be added to the state’s pension burden. And in exchange for roughly £28bn in shares, bonds and property will be handed over to the state.
Sounds like a good deal doesn’t it?
Well it isn’t.
I’ve warned about how desperate governments can make a grab at people’s pension pots in the past. Both Irish and Hungarian savers have recently been victims of a ‘state pensions grab’. And this looks like another classic example.
Of course it’s all dressed up to look like government is doing the Royal Mail a big favour. But I suspect that over the long run this will be a lose/lose deal for taxpayers. It’s all to do with creative accounting.
Let me explain…
The £28bn accounting scandal
The Royal Mail pension fund is in a bad way. Though at £28bn the Royal Mail has a very substantial portfolio of assets, in reality it’s still facing a shortfall of nearly £5bn. Like many schemes, it’s the victim of increasing life expectancies and shabby financial returns.
But never mind says the Government… “Tell you what; give us the £28bn now and we’ll pay out your pensions in the future. We’ll cover any shortfall that may occur…”
Why would the government want to make that commitment? Two reasons.
First, it wants to privatise the Royal Mail at some point – they want to get a few quid in the door. And they’ll never be able to sell it all the while it’s got a massive pension deficit.
Secondly, it’s all down to an accounting trick. You see, in the national accounts it doesn’t need to show the pension liabilities they’re taking on. It’s just expected that they’ll be paid out of future taxation – and that is someone else’s problem down the line!
Of course if you tried that sort of a trick in the corporate world you’d wind up in the clink. But these guys are in charge, so they do what they like. And with this wonder-scheme they get £28bn in readies right now (well at the end of March if the move is approved).
The Western moral deficit
This is typical of what’s happening in much of the West today. As societies, we’re heavily indebted. And it seems the only way to make ends meet is to take on further debt to try to balance the books today. This is surely storing up trouble down the line… it has to be morally wrong.
The national balance sheet is degrading every second of every day. This isn’t party-political. It’s just a symptom of mature societies that won’t (or can’t) face up to reality. And the reality is that we’re a lot poorer than we like to admit.
Alas, accounting tricks don’t change reality. Sure, they can change people’s perception of reality in the short run, but the truth will out in the end.
What we’re looking at with this pensions grab is moving a ‘funded’ scheme (where pensions are backed up by investments) onto the government’s books. Thus the Royal Mail’s scheme will become ‘unfunded.’ We’ve already seen how vulnerable such schemes are. Basically the government has said to civil servants: ‘We can’t afford your gold-plated pensions anymore. You’ll have to work longer, pay more in, and take less out!”
It is unilaterally changing the rules – again, something you can’t do in the private sector. If someone took my funded pension (even if it wasn’t enough savings to pay what I’d hoped in retirement) and gave me a government ‘promise’ instead I’d be spitting feathers.
And yet this con could take off!
The Sunday Times continues: “Tory donors in the City are pressing Osborne to tap pots of pension cash trapped in the public sector to fund his infrastructure ambitions. While the state’s biggest pension liabilities are entirely unfunded, there are thousands of schemes run by local authorities, police forces and quangos that could be consolidated into a new super-fund.”
So if all goes well with the Royal Mail pension fund grab, then Osborne may feel sufficiently emboldened to try again and grab some more pension assets.
Am I just being cynical? No I don’t think so. The scale of debt that this mature economy is carrying is simply staggering. We cannot hope to continue to carry such a heavy burden. This government certainly can’t honour the commitments that have been promised by the last lot – never mind the promises this coalition has made.
Let’s not forget Gordon Brown’s raid on pension cash back in 1997. Having noticed that the pension funds were well financed, he spotted a golden egg. He just couldn’t resist taking it. And that was at a time when the government was relatively solvent!
I think raiding pensions will be one way that governments seek to address our debt burden. This Royal Mail deal could be just the start.
As David Stevenson at The Fleet Street Letter has pointed out – “a scared government is a dangerous beast”. David has been banging the drum about a pretty devious plan to raid your pension by fiddling gilt rates.
As for me, I think we’re working our way towards the end-game for the financial system as we know it. There could be quite a few years of can-kicking left – and that’s going to favour some investments over others – we’ll keep a look out for the best opportunities accordingly.
How you could protect yourself
As with all things financial, the key is diversification. You certainly don’t want to be reliant on any one form of savings.
I’m seriously considering whether it’s worthwhile making overpayments into a pension. I could save any overpayments in an Isa instead. Like pensions, they offer income tax and capital gains tax advantages.
With Isa allowances now over £10k a year (and with a partner, that’s £20k) it means your Isas could grow into a serious addition to your core pension. At the same time, it’ll make it harder for the government to ‘grab’ these savings.
David Stevenson has a few ideas about how to your build your own savings pot. If you haven’t had a chance yet to view his report on the lengths this government will go to save their hides, you should do so. It’s an eye opener.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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