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Good news on pensions: Personal Accounts look doomed
You can take the man out of McKinsey, but you can’t take the McKinseyite out of the man. If only the UK’s Labour government had remembered this adage when it asked Adair Turner to look at pensions. Having produced an excellent diagnosis showing the vast size of the problem, he came up with a textbook example of a management consultant’s ability to use impeccable logic to reach the wrong conclusion.Â
His National Savings Pension Plan was immediately dubbed NATsPiSS, so Labour’s legislation that followed metamorphosed it into the meaningless Personal Account. From 2012, every employer was to put each employee into a savings scheme. Only now has the enormity of this task started to dawn. The prospect of 100,000 employers a month trying to enrol their staff has obliged the government to put back the start date for small employers, while cutting the minimum contributions to the point where they are little more than loose change.
The 3 percent from the employer and 5 percent from the employee will only be payable from 2016, a four-year delay. In the first year, employers must pay 1 percent, with corresponding cuts in employee contributions. This raises the possibility of scrapping the whole misguided venture before too much damage is done.
The Conservative opposition swiftly promised a “fast and dirty” review, although it’s not clear whether Nigel Waterson, the party spokesman, has really grasped that the whole scheme is a terrible mistake.
Banks must see the debate has changed
Regulators are rarely accused of being too candid. But Adair Turner’s observation that the financial sector is too large has seen the chairman of Britain’s Financial Services Authority swamped by a wave of protest.
Executives, lobby groups and even Boris Johnson, London’s Mayor, have responded with dire warnings about the risks of undermining the financial sector. This knee-jerk response shows the industry still fails to understand the consequences of the crisis it helped to cause. It is high time bankers engaged in a proper debate about their future.
Old idea, new thinking
The comments by Adair Turner, chairman of Britain’s Financial Services Authority, have reignited a debate over a Tobin tax on financial transactions. A number of commentators including our own Matthew Goldstein have advocated one, but the fact that a financial regulator is publicly floating the idea adds some substantial heft to the discussion.
The tax was proposed by Yale economist James Tobin in 1972, as the fixed exchange-rate system was falling apart, to discourage destabilizing short-term currency speculation.
Turner is right to take on swollen banks
So the watchdog can bark after all. Adair Turner, chairman of Britain’s Financial Services Authority, says the financial sector has “swollen beyond its socially useful size”. That is a striking statement for any financial regulator, particularly one that counts promoting London’s financial centre as one of its goals. Identifying the problem, however, is the easy bit. Reversing decades of financial expansion will require global agreement on tough new rules, and the determination to make sure they are consistently enforced.
Turner’s comments, in a debate hosted by Prospect magazine, underscore the extent to which the crisis has upended the received wisdom among policymakers. For years they assumed markets were self-correcting, that financial innovation brought lasting economic benefits, and that regulators should think twice before getting in the way.
FSA barks up wrong tree on guarantees
The Financial Services Authority has since the credit crunch had a bee in its bonnet about the incentives and rewards offered by financial firms and whether these encourage risky behaviour. It’s a perfectly reasonable concern. Big bonuses probably did skew behaviour towards excessive risk taking in some cases, although the crazy risks run by employee-shareholders at Bear Stearns and Lehman Brothers suggest it might be a more complex picture.
But the FSA’s latest campaign — against long-term bonus guarantees — simply doesn’t make sense. The regulator has written to more than 40 chief executives in the financial services industry warning them against offering bonus guarantees with a duration of more than one year. This is “inconsistent with effective risk management”, the letter states.
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The whole idea of guarantees is of course a loaded one in the wake of the crisis. Some feel that bankers have come through it in better shape than their shareholders.
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The Wall
