Pensions: Treasury in denial

Not because after 11 years of abuse the rules are worth preserving in their current form, but because, if they are going to be revised, the job should be done properly.

This means that, in the national balance sheet, the Treasury ought to include items such as both public-sector pensions and the obligations likely eventually to fall due under Private Finance Initiative contracts. These, separately and together, dramatically alter the picture of the nation's financial health - which is possibly why our now sadly politicised civil service prefers to pretend they do not exist.

A year or two back the potential bill for PFI was estimated at more than £70 billion, but this sum - though not small - is dwarfed by the coming bill for pensions. In a letter yesterday to the Financial Times, pensions expert John Ralfe said that if the figures for the 7.5 million workers in the National health Service, in teaching and for the armed services were aggregated from the numbers disclosed in published accounts, then the total capital cost is already a massive £800 billion.

Ralfe points out that as these pensions are index linked, and in essence deferred pay for the employees, it is the equivalent of issuing them with £800 million of index-linked gilts, which they would then redeem in retirement. Put that way it is clearly a liability of government which it is totally irresponsible to continue ignore.

What is really alarming, though, is that the attitude to public-sector pensions seems to be a re-run of the attitude to Equitable Life, as laid bare last week in the report from the parliamentary ombudsman, Ann Abraham. Her conclusion was that the failure of the insurance group stemmed, at least in part, from a failure of regulation which for most of the time was in the hands of government, within first the Department of Trade and Industry and then the Treasury. The real lesson here lies in the dangers of ignoring the evidence. The problem Abraham highlights is not that regulators did not realise what was going on, but rather that they did suspect that the group was potentially heading for the buffers, but simply hoped something would turn up before disaster struck so it would all be OK in the end.

The philosophy was to turn a blind eye, keeping fingers crossed that in some unexplained way the problem might just solve itself - or as a fallback, not emerge until the relevant parties had safely moved on either to other responsibilities or to retirement.

It does seem that much the same attitude now prevails over the looming bill for public-sector pensions. Sadly the mixture of blind eye and denial did not make the numbers add up for equitable Life, and there is no reason to believe it will work any better for public-sector pensions.

Wrong words for real problems

There was a wonderful newspaper article over the weekend about a company that had been bought by a private-equity group for £144 million, of which £116 million was debt. Now it finds it cannot afford the interest.

The company is profitable and there is no suggestion the operating business is in trouble, an insider was quoted as saying. The problem was simply that "the business has the wrong capital structure".

This brought back memories of the rubbish investment bankers and analysts came out with during the dot-com boom when they sought to prove even the most lousy investments were profitable. At that time they hit on the device of ignoring or exempting every conceivable cost until they were left with a positive number, as if these costs did not matter and did not have to be paid.

The reality of the above business is not that it has the wrong capital structure - it is that it is insolvent because it can't pay its bills. An individual who can't pay his mortgage does not have the wrong capital structure. He is financially dead in the water, facing foreclosure and probably about to default or go bankrupt. To pretend otherwise, to hide behind jargon, to say he is actually fine but with the wrong capital structure is just another form of denial - and the longer denial is tolerated, the longer it will take to get the problems solved.

Costly reminder from HBOS

All the talk of hBOS facing a rights issue disaster misses a fundamental point. It is not a disaster for HBOS: it has got its money.

It may well turn out to be a disaster for the investment banks that promised to cough up the necessary capital if no one else would. But that's not HBOS's problem.

After all, these are the guys who keep saying relationships don't matter any more and we live in a deal-driven world. This debacle simply reminds investment bankers such sentiments can cut both ways.