The Welfare Time Bomb

Last week I mentioned that we are sitting on a massive Pension issue here in the UK and that it isn't going to get any better as this year, for the first time in the last 10, our population grew because the rate of births exceeded that of deaths and overtook immigration as the primary cause of population expansion in Britain.

We now have 61.4m living here and 791,000 births took place in the UK last year, with a trend, for the first time in a while, that younger people are contributing more. As an increasing share of the population gets older and so drains the Welfare State on health grounds and burdens us with paying state pensions for longer, we have other issues at the new born end to contend with.

Not least, that many births puts its own strain on the NHS and other parts of the Welfare System. But an interesting fact is that a quarter of all those births were from parents who were not born in Britain so immigration was, in fact, again the largest contributor to population growth after all. William Hague famously fought and lost an election campaign on the immigration issue and tried to make it a political, not racial, debate. He failed and was laughed out by the Blair spin merchants who claimed he was barking up the wrong tree. But how wrong was he?

Studies show that the optimum population for Britain to get sensible well being is between 17m and 27m and this is based on studies, albeit mainly subjective, across the globe of countries who enjoy relatively low density pockets of population. The US came top rather oddly as you wouldn't think their inner cities showed a great deal of social well being or the murder rate wouldn't suggest such either. As with many pieces of Government funded, utopian work, the study is a bit previous unless we want to embark on a program of selective extermination as there are roughly 2-3 times the optimum number of people here already. And the population is rising - at around 0.7% per annum and this is three times the rate of the 1980's.

So as our tax take drops, in recent months by as much as 20%, as corporates currently make less and less people are working, and this figure is expected to fall further as unemployment homes in on 3m, we have a massive time bomb ticking at both ends of the spectrum. More babies are being born at a faster rate than before while we are living longer. The Welfare State as it stands and is funded today, simply will fall over in the very near future. Oh, and there is another, minor problem, that may disappear in 2032 - we have much increased borrowing as a nation as we have pledged so much into the failed banking system, which wasn't exactly planned for.

Put in those simple terms, we have a major problem facing Britain. It's all very well to moan about immigration being an issue but it's a done deal. In fact, if anything, more people are leaving than arriving now. Perhaps they can see the problem better than the rest of us. The Welfare System will implode - and we are not that far away.

We talk, this year, of a lost generation of youth as young people have been disproportionately been hit harder by the recession in terms on unemployment than older people. We are also talking of raising the retirement age, as we cannot afford the state pension payments for longer living people, to 68 and even 70, which only postpones the problem. But it creates a huge problem for young people arriving on the job market - what chances do they have of getting a good start to their career and what chance do they have of progression if older people stay in senior roles progressively longer?

The answer may actually see Britain suffer a 'brain drain' much as Ireland experienced some years ago. But it is different for Britain as we have a dense and ageing population and we don't have generous payouts by the EC to help incentivise companies to relocate here. In fact, we are becoming a less attractive proposition as our employment laws fall into line with Europe and greater strain will go on employers to retain, potentially, less flexible staff for longer who will require senior levels of pay and benefits. Meanwhile, at the bottom end, we will see a greater onus on employers to put greater provision aside for pensions for new staff as time goes on. What happens next may already be occurring as this week BT, one of the largest employers in Britain, announced that it had suspended its graduate entrant scheme - while many others have cut back the number of graduate entrants.

There is now the standing joke that the best prospects of a career start for many new graduates are call centres - what a training ground for Britain's best talent.

What the credit crunch and recession has done is to bring the underlying issues into stark focus for us all but we have yet to understand the implications. It comes to stupid things like this - as we fight two major wars in Afghanistan and Iraq, we have stopped our Army Reserves, the TAs, from training with live rounds while regulars also have seen their training with live ammunition be cut back in order to cut costs. We have systematically reduced the Armed Forces and its capability at a time when it has been most utilised since WWII. But such stupidity is now prevalent at all levels with retirement ages increasing while unemployment in the young is peaking.

What it all boils down to is that the Master Plan set out by this Government, underpinned by a Fiscal Policy that relied out a banking system that had to continue to grow way beyond the actual growth of the nation, was fundamentally and catastrophically flawed. I don't know if any other Political Party could have done or will do any better - in fact, I severely doubt it given their absurd utterances - but I do know that the whole New Labour Project was built on bright ideas by 'champagne charlies' who thought if they talked a good story rather than execute the plans sensibly, the whole world would just go along with them.

Well, they have got us into a hopeless situation that isn't going to get any better until they get their priorities right and they address the real issues of this nation rather than pandering to the whims of a small number of incredibly wealthy people because they only want the world set up to serve them.

It could not be further from the make up of the Labour Party. It could not be further from what this country needs.

Man or Mouse?

In the murky world of blameless politicians, Lord Myners takes some beating. Hung out to dry by his superiors who need their scapegoat to distance themselves from the debacle over Sir Fred Goodwin's outrageous pension 'deal', Lord Myners was up in front of the 'beaks' yesterday at the Treasury Committee, explaining why Sir Fred had been rewarded for failure when this was exactly what Lord Myners and the Government had sought to protect us all against - after all, it is our money.

Part of the trouble is that Civil Servants and Politicians have a distorted view of pensions. They are not of the real world - pensions to them are something that are paid out of a limitless public pot contributed freely to by current taxpayers. There is no 'accruing fund' or investment strategy, 'money in equals plenty of money out'. So the concept of Sir Fred and RBS having to bolster a pension pot on behalf of an individual is quite alien to most politicians and civil servants - for their world, this is not a reality. Out here in 'reality 2009' we have to find ways of bolstering our dwindling pension funds in order to get some income in retirement and for poor Sir Fred, if he was to get that, then it would need a hefty increase in his pension pot to buy his future.

This was the start of what was to become a very stupid and embarrassing scenario, and the tactical smokescreen that was thrown up was Sir Fred's apparent gracious waiving of his 15 month salary entitlement as compensation for stepping down early. This was something most politicians understood as being embarrassing - after all, Lord Mandelson had recently received 3 years salary from the EU having voluntarily stepped down to take another job - something unheard of in the Private Sector but well understood by 'Fat Cats' in the world of public service and politics. The thought was clearly that the Government had won a small victory over Sir Fred and everyone joined in saying Sir Fred 'had done the right thing'.

But Sir Fred hadn't got where he had through being stupid or by doing the right thing. In his 20 years service at RBS he had managed to build it to be one of the most profitable and largest banks in the world and then bankrupt it. He had done everything but the right thing in most people's eyes. So the last laugh was on the Government - if they thought Sir Fred would walk away empty handed and full of humility, then they were idiots.

As indeed they were.

The Pension

Fred Goodwin had done 20 years service and RBS had a defined benefits pension scheme. Under the scheme he would be effectively retiring early without full service and at the age of 50. In doing so he would be entitled to a far smaller percentage of his salary than if retired at the right age and had a full 30 years service. So, it was decided that a discretionary award would be made to 'top up' his plan and also took into account things like bonuses even though such schemes are 'final salary' schemes based only on basic salary. It has also been revealed that RBS chose to pay £1.8m of tax on top of the £16.9m in his pension pot, half of which was added in order to achieve a final annual pension or £703,000.

Sir Fred had agreed to pay back a lump sum (his 15 month salary) of £2.7m in order to preserve this lucrative pension and for the generous payment of tax. The negotiators chosen by the Government to hammer out the deal with Fred Goodwin were the Non Executive Directors, Tom McKillip and Bob Scott who were formerly Chairman and Head of the Remuneration Committee at RBS respectively. Quite how they arrived at such astronomic figures is hard enough to believe, but quite how anyone in the Government or UKFI (that would be us, the taxpayer) did not look at this is beyond comprehension.

What They Are Asking Us To Believe

Lord Myners, UKFI and the Government at large are asking us to believe that not one single person who had a vested interest bothered to scrutinise the deal on offer to Goodwin and further, they are trying to claim that McKillip, Scott and Goodwin signed the deal before it could be ratified by the Government. Clearly, in order for the latter to be achieved legally, then the Government and UKFI must have given a free rein to McKillip and Scott to strike a deal no matter what the cost was.

To my mind, the Government and UKFI focused on the pay off not the pension and I would assert this was because they do not understand how much private sector pensions actually cost.

Myners told the Committee yesterday that the pension was 'quite extraordinary' in several respects - no kidding? Because the benefits exceeded the cap set by parliament, 97% of the pot was put into a personal trust called a Funded Unregistered Benefit Scheme (Furbs) which is not allowed to provide a tax-free lump sum. In December 2007, after Sir Fred had been asked to leave and RBS was already in taxpayer hands, the Board decided that if Sir Fred took a lump sum from the Furbs then RBS would compensate him for the tax he would have to pay. Myners claimed this was not disclosed to shareholders (the Board clearly had no Government appointed representative despite owning over 70% of the bank) and was a significant amendment to Sir Fred's contract of employment. It should be remembered that Sir Fred claimed to the Treasury Committee in February that his pension was a defined benefits scheme, the same as all staff received at RBS.

It is clear that the Board members at RBS negotiated this settlement without involvement by the Government or UKFI. However, it was also clear that they did exceed any remit given to them - if so, then clearly there would be legal repercussions. The Government and UKFI allowed this to happen. Quite why Myners or Glen Moreno at UKFI did not ask what the details of the final settlement and particularly the pension would be is baffling to say the least. Given that the whole affair was a political hot potato then surely the PM, who stood to be embarrassed by his friendship with Goodwin, should have taken at least a passing interest.

The Facts

The fact remains that this whole sorry saga is all about due diligence and what Brown himself has recently referred to as 'laissez faire' Government. We are going through an unprecedented period of history which has seen the collapse of the banking system due to authorities allowing long term, systematic greed to drive the financial world. Yet when it comes to solve the crisis having allowed it to develop, it has applied the same principles of lack of attention, lack of diligence, lack of understanding and lack of care. This time around they were using public money to solve their mess and they showed even greater incompetence and lack of care as they handed it out without requirements of receipts to see how it was spent. The magic wand of public money was waived and they expected all to be reassembled as before without anyone understanding how it would be done.

They also overlooked the issue which caused it - greed. There was no way that the banking industry would reassemble itself without the same focus on earnings and that is why Fred Goodwin, Tom McKillip and Bob Scott see they have done no wrong.

In the great scheme of things, the £8m top up to Goodwin's pension pot is only a minor percentage of the £37bn spent by the Government in bailing out RBS, a mere 0.0002% to be exact.

Viewed from that angle it seems the Goodwin pension saga is trivial. We the public, who funded it, have a very different view. RBS clocked up the largest loss in UK Corporate history causing a £37bn bail out plus loans and guarantees for the debts run up - potentially mounting to a number greater than the UK GDP. For that, its former CEO is a) allowed to walk away having negotiated his end deal, b) retire and c) have an annual pension from the age of 50 of £703,000 and have a tax bill of £1.8m paid for.

It really does not matter what excuse Myners, UKFI or the Government come out with or the pathetic attempts to appeal to Goodwin's better nature to rectify the problem. It was caused by the crux the whole financial collapse - incompetence, negligence and lack of understanding. For any other mortal employee that would mean instant dismissal - for the Government and their stooges, it is just a minor blip on the sunny horizon.

Why Was Goodwin Not Sacked?

It still comes as a surprise to many that Fred Goodwin was not sacked.

Breaking Corporate loss records spring to mind as a decent cause and you would think that even if he felt that due procedure had not been followed in terms of HR governance, no tribunal would support him and even if they ruled in his favour, the award would be trivial and worth it.

That has a slight snag. You see Goodwin would assert he was merely unlucky. If the financial system had not unraveled in front of his eyes he would still be perched at the right hand of the PM himself and be accoladed as Businessman of The Year in many newspapers like the Times who now lambast him. The snag was that Gordon Brown himself has deemed that the whole banking crisis started in the USA and was called sub-prime - in true revisionist style he has explained it is also a global crisis. He has made sure that it was not anything to do with Britain and its finances although he does suggest that he should have done more back in 1997 after the Asian crisis.

So Goodwin could very easily argue that none of this was his fault - it was a global phenomenon starting in the US and he could not be blamed for how it affected RBS. After all, the PM said so himself, and he is never wrong.

Sacking him could have been difficult when people like Brown make up reasons to save his own skin which inadvertently others can hide behind to mask their own incompetence. Instead Fred Goodwin was allowed to take early retirement and he could dictate his terms with his cronies form his own Board, all because the Government gave him the perfect get-out clause and were stupid enough to allow it.

This whole saga relating to Goodwin's pension started at Gordon Brown's denial of the true cause of the banks' collapse and the way in which he has tried to rectify it. Blame has a habit of finding new homes and Myners will be left out to be slaughtered. The real culprit plots and schemes to live another day.

'Humility Needed - Can You Lend Me Some?'

Gordon Brown is in the US and today becomes only the 5th Prime Minister in history to address Congress. Of course, he will get a warm welcome there after all the good behaviour in that 'Special Relationship' but he has a new word to chuck at them - 'Protectionism' and it is probably not what they want to hear.

In an interview in the US, Brown has sort of echoed Alistair Darling's call that Ministers should show 'Humility' and a 'Collective Responsibility' for the economic crisis we are in. Brown seemed to echo this saying he would not shy away from his responsibilities but he was quick once again to say that current economic woes were not pertinent to Britain but were caused but a global financial freeze up.

Previously he has put the current woes down to sub-prime mortgages in the US but, of course, in present company that would not go down well. Besides, I think even he has heard the excuse enough to know it's untrue. Britain built its economy on a flawed business model and we are now victims of it. That many other countries did the same is neither here nor there - we knew it was not sustainable so we should not have pursued it. Consequently, the policies and vast monies to put the situation right has only endeavoured to sustain the failed business model. It is good money after bad and has compounded the original error massively.

No matter what Brown says, the problem has got bigger from his ineptitude to deal with the basic problem - the flawed business model.

Protectionism Is Not Nice

In the US Congress they recently passed a Bill which would stimulate the economy but it had the nasty caveat that as much as possible, US steel, iron and manufactured goods should be used in the process. This has set Brown on a path to warn of a global fight on the recession and that protectionism will not help stimulate the world markets. To the fiercely patriotic Americans this will be like a whisper at a football game - they will not hear it and are not interested. It is protect their own time.

It's pretty rich from a man whose first reaction when Iceland's banks failed and the country slid toward bankruptcy was to threaten legal action to recover the funds British people had in them. Let's actually be honest about it - he meant British local authorities who had around £1bn in the banks. While it was a good thing no depositor lost their money, if you invest in foreign banks then surely you do it at your own risk. What Brown should have been doing was making sure that Icelandic deposits were protected by the FSA rather than kick a country in the teeth when it was down.

Brown will, in his speech to congress, liken the fight against the global recession as akin to fighting the Nazis in the 1940s. That should twang the heart strings of the Americans who rescued we British from the clutches of Hitler. The analogy falls a little flat as the enemy is unseen, is not preaching hideous ideology, isn't slaughtering Jewish people and is not firing bullets at or invading countries. That's the sort of the thing the US and UK do to Iraq. Brown writes books on courageous feats and he clearly likens his mission to some night time, low level bomber like Leonard Cheshire, taking out V2 rocket launchers so that we can all live safely.

Sadly for Gordon, there is no war. It's just a long clear up process of the financial disaster he and others walked us into. There is no 'Virtual Hitler' just the spectres of the dumb politicians and avaricious bankers who brought the mess on us. He is fighting people like himself.

The Story Continues

Meanwhile, back at home, we await the next round of the Goodwin Pension Fiasco. It threatens to run longer than Peyton Place and is at least as interesting. Will Sir Fred have to give back part of his pension entitlement? In the left corner is Harriet Harman who clearly senses there are votes and popularity to be won if she can be party to it by mentioning it. On the right, Fred Goodwin himself stoically sits atop his vast pension pot waving two fingers in the direction of the Government.

If you send monkeys to solve the problem, give them peanuts and they will go away happy. When Brown et al are considering what they should be showing humility about, failure to negotiate directly with Fred Goodwin should near the top of the list.

Just behind fouling up the economy and making us liable for £1.3 trillion of bad debts.

The Dawn Of A New Era

RBS finally gave us the full force of the bad news this morning. It was nothing less than what we expected, to be fair, as they clocked up UK Corporate record losses of £24.1bn for 2008.

It means the bank will be radically reformed and the first thing that will happen is that around £325bn will be sidelined as bad debt and insured under the Government's Asset Protection Scheme which will allow it get back to lending to firms and individuals.

Chairman Philip Hampton blamed the loss of 'massive turbulence' in the financial market - absolutely nothing to do with the massive over-extension of the company through raising borrowing under Fred Goodwin.

Outcomes

One of the most obvious effects of this massive loss, aside from the minor detail of largescale unemployment, is that sport will be hit big time. RBS had embarked on an unprecedented spending spree to sponsor sport and sports people making several famous individuals highly paid ambassadors to sport for RBS - some appointed just weeks before RBS' demise. These include Sachin Tendulkar, Jack Nicklaus, Jackie Stewart and Zara Phillips. Many other sports will be deeply affected by the loss of RBS money and F1's Williams Team will need a new sponsor soon as will Andy Murray to name a couple while the deal with the RBS Six Nations was recently extended. However most deals have a longevity to them so they are no way immediate cuts.

Some Things Remain The Same

But warm your heart as some things about RBS remain the same. Thankfully the £650,000 annual pension granted to ex-CEO Fred Goodwin remains in place and he can draw it merrily. He is just 50 years old and he has a pension pot worth £16m .

Sir Fred was the man at the helm when the proverbial hit the fan and he was the man who out-white-knuckle rode the competition to buy ABN AMRO Bank who were widely seen as the most vulnerable to the credit crunch, handily placing them in the taxpayers' check out trolley when the music stopped on the merrygoround. RBS is now 70% owned by a group of notsowell-heeled mugs called The Taxpayers.

Treasury Minister Stephen Timms has realised that this pension payment is slightly embarrassing when read in conjunction with record losses and so he has has UK Financial Investments Ltd, the company set up to manage our portfolio of dead donkey companies we now own, to try and claw back some of the payment.

We all know Gordon Brown was 'angry' about bonus payments being made after the Government bail outs as if he was totally unaware that banks pay them when he negotiated the clever deals to save them. Now his Ministers seem dumbstruck by the intensity of the money-siphoning bank executives were guilty of and seem once again not to have anticipated such embarrassing details coming to light later. Why Timms cannot just instruct a lawyer to go and claw the money back is beyond me but once again the dark influence of the banking advisers at the side of the Government's decision making seem to be at work.

They seem to divert the PM's attention from the obvious and make him focus on the 'Big Picture' - how to make a small number of people very rich again at the expense of smaller individuals and companies.

So Fred Goodwin has the last laugh - after being fired he had set himself up for life, we find. All very convenient, it's as if he always had his insurance policy ready and that the Ministers who presided over the incompetent bail outs never suspected.

To my mind it proves that Goodwin and others knew far more about the possible outcomes than they make out.

The Obvious

There are two things that struck me about Fred Goodwin's disgusting pension situation. One is that he should be personally appealed upon at minimum to defer any pension until he is at genuine retirement age rather than just firing age. The second, who on earth granted such a show of appalling largesse?

Company Remuneration Committees are generally the odd company executive and then a bunch of relaxed, well-heeled Non-Executive Directors who are too fat, rich and have too many other such freebie engagements with other companies to either notice or care about what is going on. They are not going to rock the boat and stop executives paying themselves ludicrous bonuses or grant daft pension rights as they can easily be voted off at the next Board Meeting - so they just nod, take the free lunch and pick up the cheques.

Something has to change. The UK must break this stranglehold of members of the Non-Executive Club who have portfolios of watchdogs and FTSE 250 companies where they literally do nothing and get fat fees - making sure their pet executives who pay them get what they want.

Defined Benefits

Goodwin argued at the Treasury Committee that he had the same pension as everyone else at the bank - a defined benefits scheme. I suspect his worked slightly better than the other thousands of staff who will shortly lose their jobs due to his incompetence.