Inside the world of business
Unfortunate paradox of pension policy highlighted
YESTERDAY’S conference on pensions hosted by employer and business group Ibec highlighted an inherent paradox of the Government’s recent changes to pension provision. By introducing more stringent standards in order to ensure the future sustainability of pension schemes, new rules may have the effect of forcing some pension schemes to wind up.
As Ibec rightly pointed out, the changes are being introduced at one of the worst times for pension schemes, which are already under severe pressure. About 80 per cent of defined benefit schemes are in deficit, according to the Pensions Board.
While Ibec presents cogent arguments to justify the employer position – after all, companies will bear the brunt of any changes to pension provision – there are flaws in its arguments. Its contention that the current funding standard, predicated on whether a pension scheme would be able to meet its liabilities if wound up immediately, is based on a hypothetical scenario is itself questionable. While Ibec points out that schemes are “not built to wind up tomorrow”, the reality is that the current economic and pensions crisis means many companies are considering winding up defined benefit schemes, with some not having sufficient assets to pay existing members.
Similarly, while Ibec criticises the current system, which values liabilities on the basis of annuity prices (currently at historic highs), pointing out that most healthy schemes do not need to buy annuities, it fails to suggest a serious alternative.
Nonetheless, Ibec’s critique of the Government’s current pension policy contains worthwhile and sophisticated points. Its suggestion that the 11-year timeframe for companies to clear their deficits is “arbitrary” and that the time granted should be proportionate to the maturity of the scheme is noteworthy. Similarly its criticism of the current scenario whereby existing pensioners take precedent over active and deferred members in the event of a wind-up of a pension scheme is one that is shared by many.
It is in the Government’s interest to take note of the objections. After all, if occupational schemes cannot provide for the pensions of workers, that task will fall back on the State.
Cons of cutting healthcare costs
The unremitting focus on cutting healthcare costs could see Europe losing investment and jobs in the pharma sector, the European Council was warned yesterday. Writing to EU leaders ahead of the summit, the president of the European Federation of Pharmaceutical Industries and Associations, Andrew Whitty, said a short-term focus on cost-cutting was undermining sales and creating medicine shortages for patients, as reported in the Financial Times.
Sanofi, Pfizer, GlaxoSmithKline, AstraZeneca, Novartis and Merck Serono have all cut back facilities and staffing in Europe in recent months, while shifting research investment to locations including Boston and Shanghai.
Whitty, chief executive of GlaxoSmithKline, one of Europe’s largest drug makers, said the pharmaceutical sector had shown its willingness to help governments struggling with funding problems.
He estimated it had absorbed price cuts and discounts in Greece, Ireland, Italy, Portugal and Spain totalling more than €7 billion for 2010-2011, or more than 8 per cent of turnover in those markets.
Whitty’s comments come just days after the Irish Pharmaceutical Healthcare Association – the local industry group – and the Department of Health reached a truce over a block on access by new, approved drugs to market here.
While the industry clearly is coming from its own position of interest, any loss of value-added input by the pharma sector in Europe will clearly hit Ireland disproportionately, given our reliance on companies in the sector for investment and jobs. Governments here and in Brussels should consider carefully before pursuing cheap headlines.
Cost of Ulster Bank debacle will be reputational as much as financial
The computer problems at Ulster Bank are causing understandable rancour with customers. While the bank’s focus is on restoring the data, one assumes officials at the Central Bank are turning their attention to the origins of the problem and how to prevent a similar situation arising at other banks.
One thing is certain: the final bill for fixing the problem not only at Ulster Bank but across the entire Royal Bank of Scotland Group is going to prove costly. Cancelling fees and paying overtime to employees will push up the bill, as will any compensation claims that may arise on the back of the computer problems. As part of Britain’s biggest government-owned bank, the costs may not be insurmountable but will be painful.
What is less clear is the reputational damage to the bank at a time when the entire sector is not held in the highest esteem. The problem isn’t merely one for Ulster Bank. Consumers are likely to be less enamoured with the idea of online banking after the events of the past week. If anything it has bolstered the case for the branch network.
RBS chief executive Stephen Hester yesterday said the “glitch” will be taken into consideration when it comes time to estimate executive bonuses. “All of us are judged in part on customer service, from me downwards,” he said. “There’ll be proper accountability” and RBS “will be able to take the financial consequences”.
While Mr Hester was no doubt trying to show empathy with the plight of customers, even addressing the question of bonuses will send the blood pressure of some small business owners close to boiling point as they struggle to manage their cash flow.
Bonus considerations aside, the one area of future spending that may be relatively straightforward will be the annual budget for IT. For the next few months, at least, IT managers should have a relatively easy case to make, not just at RBS and Ulster Bank, but in most financial institutions.
Even outside the financial world, IT heads will be whispering the name Ulster Bank in ominous tones at budget meetings for the next while.
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Quote of the day
Merkel has emerged as a strong leader. Unfortunately, she has been leading Europe in the wrong direction – Billionaire investor George Soros
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