Better annuities long overdue

At a fringe meeting on the future of annuities, the IMA's Richard Saunders made a powerful case against the current requirement that forces people to buy an annuity at 75. Citing soon-to-be-published research, he demonstrated that income drawdown - whereby a set percentage of the pensioner's capital sum is taken as income every year while the rest is left invested in a mix of shares and bonds - would yield more money to the pensioner, and therefore more tax for the Exchequer. Nor would people run out of cash and become a burden on the state. More likely, there would be a small residual sum to pass on to heirs.

The case for reform grows ever more powerful. Lord Turner in his report on the new state second pension, highlighted the need for new thinking when he foresaw there being not enough capacity within insurance companies to provide the volume of annuities his new pension would require.

Meanwhile, people every year have maturing defined contribution schemes but are deprived of what ought to be an inalienable right to choose how to deploy their own money.

Treating pensioners fairly and like adults should not have to wait for the Tories to get back into power. New Chancellor Alistair Darling could make his mark by ushering in a long-overdue reform right now.

Sell-off lesson in the Post

A lot of nonsense is talked about how much public companies could learn from private equity about running a business, but there certainly are lessons to be had when it comes to disposals.

The private-equity industry thinks about how and when it will sell a business from before the time it has even been bought, and builds that calculation into its growth strategy and management plan from the beginning. Everything is tailored to having the business in exactly the right condition when the time comes to sell - the turkey nicely plumped up for Christmas. The profitable exit is the seal of success.

In contrast, public companies see disposals as a sign of failure - a decision to get rid of a company being a public declaration that the current management cannot make it work as well as someone else might. This is bad for the ego.

So, having taken the decision to sell, management wants it off its hands quickly, but often, to avoid the taint of failure, gives the problem to someone junior to deal with.

Meanwhile, no ambitious young executive wants to give his all to a business that is on the way out. Employees also get demoralised, and it begins to deteriorate.

Opportunist buyers exploit the seller's weakness still further with low-ball bids. Management's embarrassment gets ever-bigger as it comes under fire for failing to find a buyer. Finally, in desperation, a deal is struck at a price that would have been risible six months before. A once-great business goes for a song. Thus it was with internet bank Egg at the Prudential last year, and so it was on Monday with the Racing Post's sale by Trinity Mirror.

Fee-hungry investment bankers will tell you with a straight face that these disposals enhance shareholder value. Occasionally they do. But only when the sales are adroitly handled.

Shell of a way to predict pensions

One should savour the irony in Shell UK suspending payments into its pension fund because there is already more than enough money in it to pay all the benefits.

For years, actuaries and accountants have told UK corporates that their funds were massively in deficit, posed a huge risk to the parent company let alone the potential pensioners and required significant additional injections of cash to return to solvency.

But not any more. In a calculation released over the weekend, Aon Consulting estimated the top 200 UK company pension schemes were probably in surplus at the end of August, after the market turmoil, to the tune of £5billion.

That bit about market turmoil provides the clue. The credit squeeze has prompted a rise in interest rates and interest rates are key to the valuation of pension funds because the higher the interest rate the higher will be the dis-count rate applied by actuaries to future liabilities and, therefore, the lower will be the present value of those liabilities.

In other words, when interest rates are high you need to set aside a smaller sum of money today to deliver a certain sum of pension in 20 years.

In an era of low interest rates, capital will earn less and grow more slowly so you need a bigger sum to start with to get to your target.

Unless schemes are heavily invested in bonds, the broad result is that when interest rates are low, schemes swing towards deficit and when rates are high they move into surplus.

So we now have the irony that when the UK economy was in good health three years ago and companies were doing well, pension profesionals wrung their hands because pensions were in danger. Now the economy looks to be heading for a slowdown, inflation is on the rise and companies will struggle to adjust to tighter credit conditions but apparently our pensions are safe and healthy.

That may be true, given the way actuaries measure solvency, but it does not accord with common sense. Perhaps it is time we found a way to do our pension calculations more realistically.