-Susanne Charlesworth is a member of SUDS – Sustainable Drainage Applied Research Group, Coventry University. The opinions expressed are her own.-

The scenes of flooding in Cumbria are a shocking illustration of how Britain’s ageing drainage infrastructure is failing.

The function of the majority of drainage structures is to remove water from inhabited areas as soon as possible via so-called receiving watercourses as conduits to carry excess water away. Unfortunately, cities and towns have grown beyond capacity, back-up floodplains are built upon, and water overflow has nowhere to go.

Householders are shown on television blaming the government and demanding that something must be done to prevent flooding.

In my opinion, part of the solution lies in sustainable drainage, which mimics nature by encouraging filtration via permeable and vegetated surfaces and detention via ponds, wetlands and slowly flowing water.

By slowing the water flow, SUDs offers a way of attenuating the storm peak, allowing the water to slowly dissipate. As it does this, pollutants are sifted out of the water. Since many SUDs devices involve vegetation, the sustainable approach also enhances biodiversity, amenity and local landscapes.

You would think planners, Local Authorities and even individual householders would be falling over themselves to incorporate SUDs into their built environment. But no. While SUDS have been around for several decades, particularly in the U.S., Sweden, France and latterly in Scotland, uptake in England and Wales has been slow.

People argue that the cost is prohibitive and that it is difficult to maintain. Negative views could be countered by research and development, education and information.

There is also the issue of money. Research and development is expensive.

Legislation in England and Wales does not necessarily encourage the implementation of SUDs. Rather, it has get-out clauses to enable SUDs to slip down the agenda.

The problem is more wide-ranging than this, involving everything from the trend for paving front gardens, to wider issues of SUDs devices such as wetlands actually being used as water treatment installations rather than “natural” ecosystems which area protected from dirty urban water.

There is no way I would suggest that SUDs would have prevented the current flooding, but it could have helped. The likelihood is that winters in Britain will be wetter, and the weather more stormy in general. We need, therefore, to plan now for what looks like uncertain times ahead for the British weather. If the future is wet, then the future has to be SUDs.

-Damian Stancombe is head of Corporate Defined Contribution Pensions at Punter Southall Group. The opinions expressed are his own.-

Three things to keep in mind for defined contribution pensions:

Higher earners

Pension plans help build financial security in retirement, and in the face of a looming pensioner crisis the government continues its efforts to increase the number of savers. There is one exception: if you earn more than 150,000 pounds all bets are off.

In April 2010, we will see these high earners lose their tax-free allowance and suffer further through the introduction of a 50 percent income tax rate. A year later, an effective charge of up to 30 percent on all pension contributions will bring an immediate cost for a benefit realised later in life.

This substantial change to pension tax relief may dramatically affect the suitability of pension saving when compared with other investments and disengage the decision maker in the company from pension provision.

Employers would be well advised to ensure pension scheme members are aware of these changes, along with the thorough “anti-forestalling” rules already in place. They may also wish to review traditional pension provision as an effective reward strategy for key employees.

Concerns of employers about priorities

Punter Southall has completed a series of successful seminars across the UK, focused on these issues and addressed employers concerns for the provision of defined contribution pensions.

Around 250 finance directors, HR managers and pension managers representing employers attended the seminars, and the majority were surveyed on their views on the top concerns for DC pensions going into 2010.

Top of the list was the selection of the DC pension provider and design of a pension scheme (based on the closure of existing “defined benefit” final salary schemes), closely followed by the upcoming challenges created by the shift to Personal Accounts planned for 2012, along with concerns about the choice of a “default” investment fund (which scheme members who don’t pick another option are automatically placed into).

Sadly, issues such as member engagement, at-retirement education (i.e. advice for scheme members about to retire on how to get the most from their pension pot), and scheme governance scored poorly and audience interaction revealed that these areas were not considered a priority – this is despite the Pensions Regulator only last week stressing his concerns about these areas not being fully considered by employers.

These responses from the attendees closely reflect our experience in dealing directly with UK employers.

For most employers, getting the new scheme design right and selecting the most suitable provider means the challenge of balancing the need to create something of value to members along with the cost of providing it. Many large corporates are also reconsidering Trust based schemes in the light of auto-enrolment planned for 2012 and the ability to refund employee contributions within the first two years.

It is not surprising that investment is a concern given recent turmoil in markets and the swings in volatility of between 40 percent and 50 percent (in both directions) in value that many default funds have suffered. Worryingly many employers are not taking action to remedy this problem and still need further guidance on how to achieve a more consistent performance in the future.

But the issue of Employer Duties in 2012, and accompanying Personal Accounts is one that worries many employers as they are uncertain how it will impact their business.

Challenges posed by “auto-enrolment”

One particular area of concern that Punter Southall has relates to auto-enrolment (where new joiners are automatically enrolled into a pension scheme). We whole heartedly support the view that the sooner it happens, the better to encourage participation in UK contract-based DC schemes en masse.

However, the National Association for Pension Funds has echoed the views of many by telling the Department of Work and Pensions that the proposed reforms need an “injection of common sense” and has made several recommendations to improve the auto-enrolment process.

Our desire is that we look at the bands of people who are enrolled automatically and ask that this is reviewed. Auto-enrolment may be a necessary evil to force retirement saving for the disenfranchised masses but it is important to ensure that the masses are identified correctly.

The bands we suggest are those that under 30 years old are not automatically enrolled, as student debt and lifestyle apart means pensions are not really affordable. They are also all going to be working a lot later in life, probably retiring at 70 or older, so why force saving so early? Whilst Pension Credit is being washed out of the system I would also suggest that those over 55 years old are also exempt, along with greater consideration given to those at the lower end of the pay scale.

This leaves the real core market to aim at. Take-up rates will therefore be higher and more importantly, we believe it will be deemed a success.

Lloyds seems to be taking a leaf out of Vito Corleone's book: if you need someone to do something that they don't want to, you have to make them an offer they can't refuse. For the mafia boss in The Godfather, that meant decapitating a horse. For Lloyds, the UK bank whose logo is a black horse, it means threatening to cut off interest payments on your own debt.

Lloyds' plan is to convert subordinated debt into 7.5 billion pounds of contingent capital. These new-fangled securities pay out fixed coupons, but can be converted into shares in times of need. The exchange is part of Lloyds' efforts to avoid the government's asset protection scheme. Lloyds is likely to pull off this deal, but the jury is still out on whether this kind of capital will be widely used by other banks.

Regulators like the idea of contingent capital because it is better able to absorb losses than subordinated debt. The new Lloyds bonds are classified as lower tier two capital, but the Financial Services Authority includes them as part of the bank's core capital when conducting stress tests.

However, contingent capital is untested. It is not clear what price investors will demand to hold debt that carries a risk of turning into equity if things go wrong. The proposed exchange could also be problematic. Many fixed income investors aren't allowed to buy equity-linked debt.

As a result, Lloyds is paying up to get investors on board. They get to switch out of their existing debt into the new contingent capital at par, and get a coupon that is up to 2.5 percent higher than the one they're getting at the moment. For investors who bought the debt below par -- some Lloyds bonds traded as low as 15 percent of face value last March -- this means a healthy pay day.

The sweeter coupon alone probably wouldn't clinch it. Many investors would rather stick with what they have rather than accept an untested instrument which may trade poorly and could be forcibly converted into shares at a later date.

Enter the European Commission, with which Lloyds has been negotiating over state aid. The Commission is compelling Lloyds to cut off coupon payments for up to two years on bonds where it has the right to defer interest. This should help investors with any lingering doubts to make up their minds.

A healthy appetite for the bonds will be a boon for Lloyds, but it doesn't necessarily mean contingent capital will catch on. For one, it is very expensive: Lloyds is paying interest of up to 16 percent on its bonds. Not every bank will want to pay that.

The capital has other advantages: interest payments are likely to be tax-deductible, and is less dilutive to shareholders than issuing ordinary shares. Moreover, as regulators push banks to improve the quantity and quality of their capital, they will need to explore every possible source of funding.

Still, not every bank is in as dire a situation as Lloyds. Without mafia-style coercion, these kind of large-scale debt exchanges will be harder to pull off.

Non-executive directors -- particularly at certain British banks -- are not exactly flavour of the month.

There has been widespread questioning of what precisely it is many non-execs actually do, other than take home a sometimes handsome reward for attending a scattering of board meetings.

The promoters of the annual NED (Non-Executive Directors) Awards 2009 -- which are presumably the boardroom equivalent of the Oscars -- put a positive spin on their role:

The appointment of a Non-Executive Director (NED) can highly influence the success of an organisation

And NEDs bring more than their name to a company, the organisers add:

Many have gone that extra mile to challenge business practices, adding value to company strategy, performance, human resources and risk management

There's no doubt high-calibre non-execs are needed to ensure companies function properly.

So if you know a NED who you think deserves praise, now is your chance to make sure they get their name in lights -- you don't need to be a shareholder to propose someone. As the organisers point out:

Nominations have come not just from senior management but also academics, accountants, analysts, charitable trust managers, fund managers, journalists, lawyers, executive board members, other non-executives and previous winners.

- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

As the G20 ministers gather for their meeting this week, there should be no doubt about the item at the top of the agenda: the re-entry problem. At what point should the expansionary monetary and fiscal policy of the past year be reversed? And, if the answer is “not yet”, how soon does the re-entry plan need to be announced?

Since nobody is quite sure how much of the current worldwide economic recovery is a direct or indirect result of the various stimulus packages, quantitative easing, cash-for-junk-vehicles and cash-for-junk-bond schemes, it follows that nobody can be sure whether or when it is safe to reverse the fiscal expansion.

But leaving it too late to retrench will hand the decision over to the bond markets. They will be looking for reassurance from the major debtor countries that both versions of the default scenario can be ruled out.

An outright default, probably camouflaged as debt renegotiation rather than repudiation, becomes politically more acceptable than the package of expenditure cuts and tax rises needed to carry on with repayments.

A more likely scenario sees the lenders repaid in devalued currency, as the debtor country achieves the same outcome by printing money so as to generate inflation –- an option always open to any country whose debts are denominated in its own currency (i.e. not to Eurozone members).

So far, the markets have given the United Kingdom and the United States the benefit of the doubt, trusting them to come up with a plan gradually to cut their spending over the next few years.

But how long before their patience is exhausted? The numbers are frightening even by the standards we have got used to bandying about during this crisis.

On the federal government’s own optimistic projections, the U.S. deficit will be around 12 percent of GDP this year, and will still be around percentof GDP ten years from now, by which time the national debt will have grown to over $9 trillion, or more than 75 percent of GDP, compared to just over 40 percent today.

For the UK, the projections are of the same order of size relative to the economy –- and based on assumptions every bit as optimistic.

Faced with numbers unprecedented in peace time, the danger is that the markets may start to doubt the resolve of either America or Britain or both. At that point, holders of UK and U.S. gilts could decide to dump their vast holdings, driving their price down and their yield up –- in effect, demanding compensation for their prospective default losses.

The cost of insuring against default on UK government debt in the credit default swap market is already over one half of one percent, an improvement over the last few months, but still more than double the comparable figure for France or Germany.

Ironically, the very fact that so many Americans are voicing their disquiet about government borrowing is one reason to be sanguine about the outlook for U.S. bonds and consequently for the dollar, though it is still hard to visualise a turnaround in the public finances on a scale sufficient to preserve the dollar’s long term status as the world’s reserve currency.

As far as the UK is concerned, there is virtually no prospect of any serious attempt to address the problem this side of the election, so the burden will fall entirely on the post-election administration. If, at any time in the next twelve months, Labour manages to recover in the polls to the point where a minority Government becomes a serious possibility, the gilt market could panic amid a flight from sterling.

Against this background, the key player at G20 will be China. Its leadership realised some time ago that its massive dollar reserves represent a $2 trillion hostage to U.S. political will, a costly error for which they will be thankful they do not have to face the wrath of the electorate.

If dumping its massive holdings of US Treasury bonds drove the dollar down by 30 percent, the cost to China would be about $600 billion, which nowadays sounds like small change. So far, the ultra-cautious Chinese leadership has been deterred by fears about the impact of a less competitive RMB (renminbi) on its exports, but at some point the prospect of replacing the dollar as the number one reserve currency might just prove too tempting to resist.

– Margaret Doyle is a Reuters columnist. The views expressed are her own –

One of the challenges for bond investors over the coming years is how to deal with the enormous ballooning of government debt that is happening as a result of the credit crisis.

Traditionally, investors allocate funds between asset classes and require managers to manage to a benchmark. However, most indexes are based on market capitalisation: the securities with the biggest value in aggregate have the largest share of the index.

This is less than ideal in equity markets, where indexing can lead to herding by forcing investors to buy overvalued shares. But it is particularly perverse for bond investors. The countries with the largest weightings in the indices are those that have issued the most debt.

At present those are the countries with the most colossal deficits to finance. So, traditional index-tracking bond funds are being obliged to allocate more money to precisely those countries whose creditworthiness is decreasing fastest.

PIMCO, the world’s biggest bond investment manager, has come up with a new index — the Global Advantage Bond Index (”Gladi”) — that tries to get around this problem.

Gladi, which is being administered by Markit, a global index provider, is weighted by national income rather than by historic debt issuance. When initially launched, after 2 years of research, earlier this year, it was pitched as a way of “building in a tilt toward these countries that are developing rapidly but their capital markets and market capitalization haven’t caught up yet.”

However, now it is being marketed as a way for pension fund trustees and other investment managers to avoid increasing their exposure to the debt of countries like the United States and the UK, which are planning to issue trillions of dollars worth of bonds over the next few years to pay for their bank bailouts and to stimulate the economy.

Indeed, PIMCO reports that some clients want to avoid government bonds — which account for around 50 percent of traditional bond indexes (the remainder is roughly split 50/50 between corporate bonds and various mortgage-backed securities), altogether.

In the past, governments have found cunning ways of increasing demand for their bonds, whether patriotism, to flog war bonds, or requiring insurers to hold more “safe” gilts as a hedge against long-term liabilities. Now regulators are going to require banks to hold more capital, and more of it in the form of liquid instruments, i.e., government bonds.

However, they will also need to persuade non-bank investors to buy their bonds if the interest burden is not to spiral out of control. And unfortunately for the deficit-hit governments, investors seem to have seen them coming.

(Editing by David Evans)

– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

George Osborne’s plans to break the British addiction to debt have drawn protests from some business groups. He should not be put off. If a Conservative government with him as Chancellor can offer the quid pro quo of a cut in the rate of corporation tax, business should welcome the move.

Under today’s rules, British businesses have every incentive to finance themselves by borrowing: not only is interest typically lower than the return that shareholders demand, but all interest is tax-deductable. This anomaly was criticised as long ago as 1978 by James Meade, the Nobel laureate, but the position has worsened since then. Pension funds used to be able to reclaim the tax on dividends, but that concession was removed by Gordon Brown in 1997. As has recently become painfully obvious, this regime has significantly increased financial instability.

Given the impact on corporate finances, such a fundamental shift needs careful management. It cannot be done quickly, and an acute recession is not the best time to impose it, but it might be a good time to signal that it’s coming. Business is risky, and equity has proved itself over time as the best way of raising the finance to back it.

Among the critics of any threat to interest relief is the British Venture Capital Association, the trade body for private equity, the industry that has turned equity in its businesses to little more than option money. Typical capital structures ensure that the corporation tax bill is minimal, while even a small rise in operating profits can translate into massive gains for shareholders. If things go wrong, losses fall on the providers of the debt.

Banks which provided the debt have been burned by their exposure to over-leveraged companies. Unfortunately, they cannot be relied upon to remember the lesson once the current conditions fade into history. A tougher problem lies with multinational businesses. The UK allows companies to offset interest on debt raised anywhere in the world, at the cost of its corporate tax base, which has encouraged them to come here. Osborne’s plan to reduce the deductibility of overseas debt risks sending them away again, so he needs to tread carefully.

The carrot is a cut in corporation tax from 28 percent to 25 percent or as far below it as he can afford. Each cut reduces the attraction of higher gearing and the complex (and expensive) devices needed to maximise the current tax relief. Given the improvement lower corporation tax would bring to Britain’s competitiveness, the price of lower interest deductibility is well worth paying.

- Richard Whitaker is a lecturer in European politics at the University of Leicester, UK. The opinions expressed are his own. -

Europe rarely features highly in European election campaigns in Britain. In the 2004 campaign the word Euro more often than not referred to a football tournament rather than the single currency. And for at least two reasons, we shouldn’t expect European integration to be much discussed.

First, parties have little incentive to campaign on Europe because it features a long way down the list of issues British voters consider important, well behind Prime Minister Gordon Brown’s leadership, expenses, the economy, immigration and crime. Second, to the extent that parties are internally divided on the question of how far Europe should go, they are less likely to push the issue up the agenda.

In the current campaign we might have expected what little talk there was about Europe to cover the Lisbon Treaty on which the Conservatives, in contrast to the two other main parties, have called for a referendum, and the question of whether Britain should remain a member of the EU amid calls from Eurosceptic parties on the right and left, for us to withdraw from the organisation.

While Lisbon and EU membership have been mentioned, the reality is that discussion of Europe seems to have featured even less than the low level we might have predicted. Such is the domination of the campaign by the issue of MPs’ allowances that most of the main parties’ European Election Broadcasts – a place where they have the opportunity to talk specifically about European issues - made little or no mention of Europe.

Perhaps the paucity of talk about European integration would matter little if there was nothing at stake. But, like it or not, the European Parliament’s (EP) legislative powers have greatly increased over recent years such that it is now heavily involved in the regulation of the EU’s single market.

The balance of power in the EP matters between those favouring greater control of markets and those preferring deregulation. The outcome of the EP elections will also have an effect on the choice of European Commission President, who will have to be approved by the Parliament before taking office.

The polls suggest that the big parties are likely to suffer on June 4th with minor parties doing much better than they would in general elections. Small parties doing well at EP elections is nothing new. UKIP came third last time around winning 12 seats and 16 percent of the vote.

Governing parties normally do badly at European elections but if Labour were to drop below 22 percent they would beat their own record for the lowest score by a governing party in a European election in Britain. Many of the smaller parties take an anti-EU stance, especially those likely to win seats in the election (UKIP and possibly the BNP).

So if we look simply at the results this time around, the expected victory for the Conservatives and the votes for small parties may send a largely Eurosceptic message from the UK to Brussels.

This is fine, if that’s how the electorate feels, and we have plenty of polling evidence that the British electorate is comparatively Eurosceptic. But crucially, for many voters the decision will have been made not on issues of European integration and EU membership, but on the question of MPs’ expenses.

- Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. -

Is the crisis over yet?

In the last 3 months, the Dow and the FTSE have each risen by about 25 percent, the Standard & Poor’s 500 by a third. House prices appear to be stabilising in the UK. Stress-tested and backed by seemingly unlimited government funding, the banks are lending again (if only to each other), so that 1-month libor is down to only 0.3 percent.

In the Far East, the Chinese economy may be growing again, and even Japan may have pulled out of its nosedive. The oil price has recovered from its lows.

Is there any reason to doubt that the worst is past?

No reason whatever, except the following (in ascending order of gravity):

1. As unemployment increases, defaults on credit card debt are certain to rise, reducing the banks’ ability and willingness to lend to consumers.

2. Even if the residential property market has stabilised, commercial property prices appear to be in free fall, leading to further contraction in the construction sector, more bad debts and knock-on effects on employment and investment in the broader economy.

3. The consensus view is that bank stress tests, in the U.S. at least, were based on optimistic assumptions about the depth and duration of the real estate slump.

4. In order to spare U.S. and UK taxpayers, the bailout burden has been piled on to the bond markets, which have so far proved willing to finance the massive increase in the national debt of the two countries at a cost of only 3.75 percent on 10-year Government debt in UK and 3.5 percent in U.S., which is remarkable considering that both countries appear to be heading for a debt-to-GDP ratio of 100 percent or more.

However, in addition to the recent threat by S&P to downgrade UK gilts, the spread on credit default swaps is an even clearer warning: it costs 86 b.p. to insure against a British government default, and 44 b.p. for the U.S. (compared to only about 40 b.p. for France, Germany or Japan). Outright default by Britain or the U.S. is, in my view, highly improbable.

By far the most likely outcome in the medium term is inflation, or default by stealth. This is how Britain paid the bill for World War Two and the U.S. for Vietnam. So far, however, the bond markets appear to trust the politicians to come up with a plan to pay off these debts. But they will not wait forever.

At some point, they could well take fright and try to dump UK or U.S. government debt, forcing yields up to cripplingly high levels, with disastrous consequences for the real economy.

5. Who are these bondholders anyway? A significant proportion are institutions or governments of countries which, unlike Britain and the U.S., save rather than consume, and hence have balance of payments surpluses, notably the Gulf States, Japan and, most important, China. How long will their patience last? They are locked into their massive accumulation of dollar assets, unable to exit without realising enormous capital losses. But if they decide to stop throwing good money after bad, the outcome could be a dramatic rise in interest rates and a calamitous fall in the value of the Dollar, a final convulsion in this long devastating crisis.

None of these disasters is inevitable. But if you think the worst is over, ask yourself: why is the price of gold - traditionally seen as a safe haven in times of economic turmoil - rising again?

– Neil Collins is a Reuters columnist. The views expressed are his own –

Standard & Poor’s could have chosen a better day to kick the British economy, by placing the UK onto “negative outlook”, the usual precursor to a downgrade of S&P’s rating of an issuer’s debt.

The move came minutes before the Debt Management Office closed its massive auction of 5 billion pounds of 2014 stock, and minutes after the release of figures showing the Public Sector Net Borrowing Requirement leaping to 8.5 billion pounds in April, a sum which not long ago would have been considered high for a whole year.

Economist Howard Archer at Global Insight immediately called the figure “dire, starting the new fiscal year off as it is highly likely to continue.”

S&P, meanwhile, now fears that the net general government debt burden “could approach 100 percent of GDP and remain near that level in the medium term.”

It’s hard to describe the UK public finances as anything other than a disaster area. The forecasts made in last month’s Budget looked optimistic within days, and even these require the DMO to borrow 220 billion pounds this financial year, or almost a billion pounds every working day.

Yet while the DMO soaks up cash, the Bank of England is desperately creating it. Its “quantitative easing” programme has been in full swing this week, buying in 1.326 billion pounds of a stock which looks very like the one that the DMO was issuing just one day later.

The experts will tell you that because the life of the new stock is not quite five years, it falls outside the Bank’s five to 25-year target zone for QE, and is therefore qualitatively different. This is pure mumbo-jumbo. Essentially what is happening is one arm of the government is creating money for another arm of the government to borrow.

The traders can hardly believe their luck, selling expensively to the Bank and buying cheaply from the DMO.

This waste of taxpayers’ money would be bad enough, but the real damage is the false sense of security this round-tripping produces. Britain is in real danger of falling into a debt trap, where the cost of borrowing spirals up with the amount the government has to raise.

As the rating agency’s reality check concludes: “A government debt burden [of nearly 100 percent of GDP] if sustained, would in S&P’s view be incompatible with an AAA rating.”

Loss of that rating would lead to a higher cost of government borrowing, damaging the chances of avoiding the trap.

Were the Labour administration not in total funk, it might seize on this report to admit that its spending plans are not sustainable. Capital projects, like the NHS IT scheme, ID cards, Crossrail, aircraft carriers, the Eurofighter and much else will have to go, and the next government will have to impose real cuts in the core spending of education, health and welfare.

S&P’s warning shot shows that the phony war is over, and the real pain lies ahead.