David Willetts

David Willetts - then Shadow Trade and Industry Secretary - reflects back on his five years as Shadow Work and Pensions Secretary, on the challenge of the pensions crisis, and the threat of the “zombie company”.

“I would like to begin by giving you a very warm welcome to this event as it marks a personal transition for me. I look back very fondly on my five years as Shadow Secretary of State for Work and Pensions and look forward to my new role in pensions as Senior Adviser to Punter Southall.

Politics can move with extraordinary speed. It was such a sudden transition to shadowing Trade and Industry that I didn’t have the opportunity to say then what I would like to say now. It was a great privilege to work with so many able and public spirited people in the pensions community. I think of the actuaries and the demographers, the fund managers and the economists – a disparate but impressive group. We in Britain have one of the greatest concentrations of pensions expertise in the world – it is an asset which we should make more of in the global economy.Most pensions experts treat politicians with enormous suspicion. They regard politicians as spotting a problem and then making it worse. Some might even add we are the ones who create the problems in the first place. By contrast most politicians operate under the axiom propounded by President Nixon that ‘there’s nothing wrong with this country that a good election can’t fix.’

These are, you will recognise, rather different cultures. Nevertheless, a host of people throughout the industry were always willing to give me their time, their expertise and their advice. This is something I always appreciated. And I hope in return I was able to show that politicians can sometimes play a constructive role in pensions.

One of the things that the industry has always asked for is for a consensus on pensions, sometimes even calling for pensions to be taken out of politics. But it is not really possible or desirable to take something as important as pensions out of politics. If we are compulsorily to take National Insurance contributions and taxes off people; if we are determining the retirement incomes of millions of people; and if we are imposing expensive obligations on companies, then this has to be subject to democratic scrutiny and debate. But I do see the case for political consensus wherever this is possible. That is why I tried not to go for the easy criticism if there was a long-term prize that would benefit everyone. When Alan Pickering reported, it would have been easy to run scared about some of his proposals for easing the burden of regulation on company pension schemes but instead I welcomed his report. I always doubted whether stakeholder pensions were going to be the great solution to the pension crisis that was once claimed, but the industry asked us to commit to keep the framework for stakeholders and we responded by pledging not to abolish them. And most recently, of course, I was happy to support the establishment of the enquiry under Adair Turner, and look forward to what will I am sure be a very valuable report. Sir Malcolm Rifkind, who has already made the Work and Pensions brief his own, will, I know, respond to the report in a responsible and statesmanlike way.

It is exciting to design new pension systems for the future with a better state benefit system, new incentives to save, a fairer deal for women, and measures to encourage people to work for longer. It is right to look forward a generation and develop such policies. But I want to focus today on an issue which will probably not be covered by Adair Turner’s report. It is an aspect of pensions which relates to my new responsibilities as Shadow Secretary of State for Trade and Industry. It is the enormous burden of accumulated pension deficits hanging over British businesses today. This is the elephant in the living room. Even if we were to create the world’s best pensions policy for the future we would still have the awkward question of what to do about the deficits that have already arisen.

The massive gap between the assets that are held in company pension schemes and the cost of the pension promises companies have already made is having a profound impact on British business. Instead of categorising it as part of the debate on pensions policy we can think of it as analogous to issues such as the cost of decommissioning nuclear power stations, the costs of moving oil rigs from the North Sea, or the costs of cleaning up land contaminated by an industry that has long since moved away. In other words it’s a legacy issue, and probably the biggest single legacy issue facing British business today.

In the rest of this lecture I will be focusing therefore on the pensions crisis as it affects British companies today. As a politician I fully understand that equally important is the impact on individual employees and pensioners. People have expectations of the pensions to which they are entitled, expectations which have been reinforced by legislation over the past few years. Nobody would wish to tamper with these expectations lightly, and every proposal must be judged against what is acceptable for today’s employees. The human side matters too.We can consider pension deficits it in three stages. First, how did we get into this mess? Secondly, how big is the problem? Thirdly, what might be the solutions to tackle it?

How have we got into this mess?

If you want to understand how British business finds itself encumbered with such expensive pension liabilities then just think of the classic story of how to boil a frog. If you throw a frog into boiling water it hops straight out again and can survive. If you put it in cold water and slowly turn up the heat it never escapes. That is the story behind the British company pension promise. Gradually, over 30 years, successive governments have passed regulations making the company pension promise more generous and expensive. Companies have to treat widows better, offer protection from inflation, and give a fair deal for early leavers as well. These extra obligations went way beyond the original pension promise. One of the problems with a low basic state pension is that it encourages Ministers to use the regulation of company pension schemes to achieve social objectives which really ought to be explicitly delivered via the benefit system, rather than as a burden on companies.

There were grumblings from companies every time their pension promises were made more expensive. But the protests were never serious or dramatic because it was never quite clear whether the company really was obliged to meet these promises. Many companies thought that the pension scheme was a kind of with profits policy; if things went well you could make discretionary improvements but if things went badly you weren’t obliged to do more than reach the level set by the minimum funding requirement. The company pension scheme was a kind of risk sharing co-operative between the employer and employee. All that changed on the 11th June 2003 when the Government announced that the full pension promise was an inescapable legal obligation of the company with immediate effect.

As the Shadow Secretary of State I got the Government’s announcement, under conditions of strict confidentiality an hour or so before it was made. I thought that the Stock Exchange would fall around 5% when it was made. In fact as Richard Jones and Paul Geeson point out in their excellent paper, the Stock Exchange ended the day 0.6% points higher and rose a further 1.6% the next day. (This, incidentally, is a crucial piece of evidence that perhaps pension fund deficits are not properly incorporated into stock market prices). That statement made it absolutely clear to companies that the pension promise had to be on the balance sheet as an inescapable obligation. It certainly ranks above the rights of shareholders. From that moment, if a company pension scheme were in deficit then the Trustees were in effect lending money to the company without receiving any income for the scheme. In the words of David Norgrove “pension deficits are an unsecured loan by scheme members to the company.”Imagine history the other way round. Imagine it had been clear right from the beginning that the company pension promise had this legal force. Then every attempt by governments to improve the terms of pension schemes would have been scrutinised much more rigorously. One reason we are in this mess is that the scope of the pension promise was extended and only at the end was it made legally obligatory. It wasn’t a conspiracy by successive generations of politicians, but one can see why company finance directors might think that it was.

This isn’t the end of the story. At the same time we have seen a fundamental change in the economic background against which pensions have to be provided. Everyone talks about the dramatic improvements in life expectancy. Not only has life expectancy improved but the nature of the improvements in life expectancy has come in a form that hits pensions much harder. Imagine five people. One of them dies at the age of 25 of TB, a second person dies at the age of 50 in an industrial accident, and the remaining 3 live until they are 75. If you tackle TB and make factories safer then instead all 5 might live until the age of 75. This is shown in the statistics as an improvement in life expectancy from 62½ years to 75 years. But it’s not that people who were previously living until the age of 62½ are now living to the age of 75. In fact most of the extra years of life are extra years of paid work. That was the sort of improvement in life expectancy that we had through much of the 20th century. But what is now happening is that cohorts of people who previously might have died at the age of 75 are now going to live to 80 or 85. It is this sort of improvement in life expectancy which can have a much bigger impact on pensions.

One of the reasons why we pay much more attention to life expectancy now than we used to is that in the old days of high inflation, after ten years or so of receiving a company pension, it wasn’t going to be worth much anyway. Exactly how long you lived was not very important because inflation had destroyed the value of the pension anyway. It is the interaction of low inflation and improved life expectancy that has made the pension promise in the long term so much more expensive.On top of the hit on the liability side at the same time company pension schemes have been hit on the asset side. The 20-year bull run in equity markets has probably come to an end. Pension funds were also hit by Gordon Brown removing the tax relief on dividends distributed to pension schemes – his devastating £5bn a year pensions tax. So companies have ended up being hit on both sides of the balance sheet. Government regulation, improvement in life expectancy, and low inflation have all added to the cost of the pension promise and at the same time the assets to pay for it have lost value. It’s the combination of the double hit on the balance sheet at the same time that has really done the damage.

What is the scale of the problem?

We are bombarded with estimates of the scale of the pension deficits that companies face. Each major firm of actuaries seem to make its own estimates. They are on different bases as well. Some estimates cover FTSE 100, others FTSE 350, or alternatively all British businesses with defined benefit pension schemes. There is a rough consensus that for the FTSE 100 companies the deficit as measured by the latest accounting standard, FRS17, stands at about £60bn. It is often forgotten, however, that many medium size and even smaller companies have set up defined benefit occupational pension schemes. This is not a problem just confined to very big businesses. FTSE 100 companies have approximately half of the assets of all company pension schemes, so it is plausible to assume that they have about half the deficits as well. On this basis you get to a FTS17 total deficit for all British business of approximately £120bn. This is very close to the recent estimate from the Association of Consulting Actuaries which showed defined benefit scheme deficits across all of British businesses coming to approximately £130bn. That isn’t the sort of money you can hide in the roundings.

However, this is not the end of the story. Those measures took deficits on an ongoing basis. You can instead measure the amount that would be needed in the event of a scheme being wound up to pay an insurance company to take responsibility for the full benefits. Again, there is a rough rule of thumb we can use here because the Pensions Regulator has suggested that this adds about a third to the total liabilities of a pension scheme, which feeds through into higher deficits. This could easily add a further £220bn to the deficit held by all British businesses. That then provides a deficit on a wind-up basis across all of British businesses that could be as large as £350bn. We are into serious money here. This sum is equal to almost three years’ net profits by British business. And incidentally, as company pension contributions can often be offset against tax, plugging the deficits on this basis could deprive the Inland Revenue of £100bn or more of revenues. (One of the many problems in getting the Treasury to take a rational view of pension policy is that any shift from consumption to saving tends to involve a short-term reduction in tax receipts).

Fortunately pension deficits have fallen a bit in recent years. This has been because the equity market is up 65% from its low point. However, continuing improvements in life expectancy have led to increases in the liabilities as well as have falling interest rates used to price the liabilities. That is why the net improvement in the deficits has been much less. Nevertheless the optimists maintain that we are on a favourable trend and that the problem is going to solve itself. I hope this is true.

There are good reasons, however, to be wary of such complacency. For a start, the stock market would need to rise to over 6500 before most of the deficits had gone. This is quite an optimistic assumption. It is doubtful whether any organisation or business in Britain would be allowed to produce financial forecasts on that basis. And it assumes that pensions remain heavy enough in shares to gain from such an uplift. Moreover, estimates of life expectancy may not have caught up yet so there could be further offsets as pensions liabilities rise as well. There is another trap too. We talk about deficits in the aggregate. This smoothes out their effect by spreading them all across British businesses. But the pensions crisis is not evenly spread like this. The reality is that there are some very significant companies in the FTSE 100 with very large pension deficits relative to their value and revenues. Faced with increasingly demanding trustees and backed up by a regulator looking to the deficits to be paid off within 5 years or so, then the financial strain on them will be enormous indeed. It is likely that some significant British businesses will have substantial pension deficits for a long time to come with a big impact on their performance. Indeed, it is going to have a big impact on the entire functioning of British capitalism.

The other week Trevor Phillips delivered a powerful speech warning of increasing segregation between different ethnic groups in Britain. The pension crisis is leading to just such a segregation of British business. This is in addition to the growing and much resented divide between public sector and private sector pensions. There is a fast growing divide between two very different sides of business. First there are the Newcos, new young companies that did not have a big workforce in the days of conventional defined benefit schemes. In addition there will be some incredibly strong companies that have the revenues to pay large accumulated pension promises. Secondly, there are the Oldcos. These are long established companies that took on their employees when defined benefit schemes were the norm. There are many SMEs amongst them. They will be trapped in a business ghetto. They will either have to pay very expensive contributions to the Pension Protection Fund, or they will have to set aside much larger sums than they have so far to reduce their pension deficits directly. And precisely because they have such large pension deficits predators will be wary of taking them over – a pension deficit is the ultimate poison pill defence. One rule for recognising such companies is that they have ‘British’ in the title – that tells you that they were once big and proud. Talking about this with an American pension expert the other week, he observed that they had the same phenomenon in America – there the problem lies with companies with ‘General’ in the title.

This segregation between new companies and old companies will bring new instability when they are competing in the same sector. Paying the accumulated pension promise will put an Oldco at a major competitive disadvantage with a Newco. They will get into a spiral of decline. Increasingly the trustees of pension funds have to face the difficult and brutal question whether pushing the company over the brink and getting a claim on the Pension Protection Fund is a better option than struggling on in the hope of something better from the existing management.

We are in danger of having zombie companies struggling to pay their pension costs, incapable of expanding and too toxic to be taken over. This is bad for British business and bad for the British economy. Even if it is not a challenge that Adair Turner will address I do think it is something that all of us who care about the future performance of the British economy need to focus on. That is why in the final section of this speech we look at the options for tackling this crisis.

What to do about it

The good news is that there is a surprisingly wide range of options for tackling this crisis. The bad news is that most of them are unacceptable. They fall into several broad categories.First, there are a range of ways in which companies could break these pension promises. One good old-fashioned mechanism for escaping expensive financial promises is inflation. The pension crisis is crying out for a burst of inflation. That is the mechanism which historically we used to reconcile irreconcilable claims on future resources. But thanks to the independent Bank of England it is not an option which is any longer available. One should add in parenthesis that as limited price indexation only applies up to 2½% even a rate of inflation which oscillated between 2% and 3% would enable companies to slice ½% off their pension promise from time to time.

The second mechanism to enable companies to walk away from the pension promise is bankruptcy. In America, the ease of entering Chapter 11 bankruptcy and poor supervision of the insurance provided by the Pension Benefit Guaranty Corporation, has created a powerful dynamic. Entire sections of US industry go into Chapter 11, and re-emerge as Newcos without any pension liabilities attached, having left those with the PBGC. As soon as one company goes through this process everyone else in the sector has to do so as well. It has happened with the steel industry and the airline industry, and the American authorities know they have to act fast if they are to stop it happening to the automotive industry as well. The PBGC already has a deficit of $25bn and that deficit could well rise to $100bn as more large corporates unload their pension promises on the insurance scheme. At one point, I am reliably informed, the US Treasury was going to come clean and put the deficit of the PBGC on the balance sheet of the Federal Government because it is just about impossible to imagine US corporates paying the insurance premiums necessary to remove the PBGC deficit. But when the US Treasury saw how big the liability would be they are supposed to have decided against it. The PBGC is going to be America’s next savings and loan crisis. There will have to be a federal bail-out and at that point it will become clear that the interaction of Chapter 11 and the PBGC is America’s very own state aid to business. As we have now set up something similar to the PBGC with our Pension Protection Fund, then we may see pressure from businesses for a further easing of British bankruptcy laws so that they can go down the same route. And can I add, that if a Newco emerges from the PPF, having shed its pension promise, I do think it is legitimate for the PPF to take a stake in the new company in case it can recover funds from the new company’s performance.Companies could also try to reduce the value of the pension promises that have been made.

Last week the Association of Consulting Actuaries specifically proposed that “employers should have the option to change the defined benefit scheme rules retrospectively (subject to regulatory approval) to avoid increases in cost due to unforeseen longer life expectancy, for example by raising retirement age.” They went on to suggest a specific mechanism that could also be used to cut deficits suggesting “schemes in deficit should also be able to suspend limited price indexation until they remove their deficit. If this was allowed deficits could be reduced more rapidly, better securing pensions for the future.” Such options have been taboo since the statement of the 11th June 2003 but we need some sort of a debate about whether they are going to be necessary. There is currently a backstop to the company pension promise provided by the PPF. I support the creation of the PPF and believe that having some insurance for our pensions is the right thing to do. The previous approach, relying on funding rules to assure solvency, was not sufficient on its own. But the PPF levy is clearly going to cost a lot more than originally claimed. There is a real danger that the PPF levy becomes another serious burden on business. There was always a difficult balance to strike between the value of the benefits that would be covered by the PPF and the cost to companies of the insurance premium. This whole issue is going to be thrown wide open again in the coming months.When Ministers launched the PPF they rather dangerously referred to it as offering it as ‘a guarantee’ of people’s pension benefits. But actually they deliberately put into the Pensions Act 2004 powers to cut the value of the benefits offered. The Board of the PPF has the power to reduce the rate at which deferred pensions are revalued (currently they are revalued at RPI up to a maximum of 5%). They also have the power to stop the indexation of post-97 pensions in payment (currently revalued at RPI up to a maximum of 2.5%). If premiums are in danger of rising to an unacceptably high level then the Board of the PPF will have to look at these options.

The Secretary of State in addition has the power to reduce the total value of the pension paid. At the moment people who have retired at 65 are guaranteed 100% of their full pension entitlement up to £25,000 and it is 90% for those who have not yet retired. Any Minister will be understandably reluctant to exercise this power. Instead they will be tempted to allow the PPF to build up a deficit and to claim we shouldn’t worry about this because the cash flow is good even if in the long term its assets are not enough to match its liabilities. Then we would be on a slippery slope to the American situation in which the pension insurance scheme was running a larger and larger deficit and eventually at some point in the future there was a state bail-out. I hope it isn’t just world weariness after years of observing the pensions policy that my current prediction is that this is how things will turn out. It is another reason of why we need to look at fresh ways of easing the corporate pension crisis instead of storing up extra problems for the future.If the PPF were to make reductions in the value of the cover it offers for pensions then this would in turn broaden the scope for negotiation between pension trustees and company management. It might open up the option of companies making some reduction in the pensions they promise whilst still offering something better that people could hope for from the PPF. Obviously these are things which any company would only enter into very reluctantly. But the fact that we now have a Pensions Regulator in place would provide some comfort that such changes would only be possible with clearance from him.

All the options described so far are mechanisms to enable the company to abandon or reduce its pension promise. Many companies believe they have done this by closing the pension schemes to new members. This, however, is very unstable. As companies have kept their schemes open to current employees they are still accruing expensive pension promises for the future. And the guilty secret of company pension schemes is that they worked on a kind of pay-as-you-go model. New young recruits came in and paid hefty pension contributions that helped restore the finances of the scheme. When a company closes to new members it loses this option of collecting contributions from new members. It has growing commitments and a shrinking number of contributors. One of the reasons why I proposed a Longevity Bond before was to help companies in these circumstances. If they could purchase a government instrument that was indexed to improvements in life expectancy then it would give them some prospect of covering the risks they face of their pensioners living longer than they had forecast. Simply closing to new members is a very unstable option. Either companies could keep their pension schemes open and hope that the next generation of contributors would help rescue the finances, or they could close them to all pension accruals. The compromise option in the middle leaves many companies increasingly exposed.

There is one other option that the Government should look at urgently to help companies in these circumstances. There are limits on the tax relief that companies enjoy if they put big one-off contributions into their company pension schemes. But if a company is taking these steps to pay off a deficit then there is surely a case for recognising this cost in the tax system rather than penalising such corrective measures as they are at the moment. But we are going to need more radical measures than that and it is a far more radical option to which I now turn.

Today I want to focus on a further option which has not, so far as I am aware, been proposed before. Companies have been able to contract out of the state second pension if they provide a company pension that reaches a certain minimum standard. If they contract out the employer and the employee pay lower National Insurance contributions, and the amount saved, the rebate, is put directly into the company pension scheme instead. Between 1978 and 1997, the classical period for contracting out, there was a specific calculation of a guaranteed minimum pension which schemes had to provide to each member in return for contracting out. This is often a significant part of an employee’s occupational pension entitlement.

The calculation of the contracted out rebate is supposed to match the cost of providing the minimum pension. However, many companies feel that the rebates are no longer adequate. For example, if the Government is providing the second state pension it automatically adjusts to for example, improving life expectancy by just paying the benefit for longer. If it is in a company scheme then they need to build up bigger funds to respond to such changes.

One of the widespread proposals for reform of this system is that contracting out should be abolished in future, and that all companies should in effect contract back in to the state second pension. This would be a compulsory change in the pattern of flows of funds into pensions in the future. I am sure it will be considered carefully in Adair Turner’s report though I personally am sceptical.However, there is a radical variant on this which I believe should be considered as well. Companies and their pension schemes could be given the option of paying the government to take over the responsibility for the contracted out guaranteed minimum pension which they have built up over the years. It would not be compulsory: it would be an option. It would potentially involve a much larger but finite sum as it would involve shifting a stock of pension promises to the government rather than a future flow. It could potentially lead to a massive reduction in the future pension liabilities that companies face. They would pay much smaller pensions in the future because they would have paid the government to take them back.

There are a variety of formulae you could use to calculate the amount of money that companies would have to pay for this. Attached to this speech is a working paper by Punter Southall on this and other technical issues. The equitable formula would surely be to use the same model as the contracted out rebates in the first place. The Government presumably believes these are fair as they have only recently been reviewed by the Government Actuary’s Department. Many in the industry don’t think these properly allow for the cost of contracted out pensions but if the Government believes they are fair then how could they object to allow companies to pay a sum of money calculated on these terms to hand over the cost of their future pension promises to the Government.This idea has not so far as I know been put forward in Britain before. It first came to me when I was in Japan looking at their pensions system, and I discovered that this is what they have done there – the so-called Daiko Henjo. Under a law which came into effect in April 2002 Japanese companies were able to pay the Japanese Government to take over a substantial proportion of their occupational pension obligations. The implementation of this option over the past 3 years may be one of the reasons why the Japanese corporate sector has started to recover and the Japanese economy is beginning to pick up from its long recession.

The obvious question to ask is what sums of money are involved here? There is no authoritative estimate of the net present value of the contracted out pensions which companies have accumulated. My personal and very rough and ready estimate is that perhaps £150bn is at stake. I am writing to the Government Actuary’s Department asking them if they have any estimates of the net present value of these liabilities, and if they will release them. If it is on this scale, then we obviously need a much more careful consideration of the potential economic impact. We don’t suddenly want to have massive flows of money coming out of pension funds into the Government coffers, even if companies are strengthening their financial position by reducing pension obligations as a result. It is one reason why this should be a voluntary option and not compulsory. There are arguments for restricting the scale of the option. It would not be out of the range of possibility that companies would wish to shed £50bn worth of pension liabilities to the state and that they would be able to do so at perhaps the rate of £10bn a year for five years. This would be a far bigger shift and far quicker in tackling the pension crisis than any of the ambitious ideas for long-term change which are currently being debated.

There are, however, some significant objections to this idea, and perhaps I could just consider two here. First, there is the argument that it is a direct transfer of pension obligation from companies to the state. It is a socialisation, if you like, of the pension promise. It is certainly increasing the long-term obligations on the Government to pay pensions in future. So the Government gets revenues in the short term, and a greater liability to pay pensions in the long term. The boost in revenues would have to be used, like for example the sale of the third generation of mobile phone licences, for debt repayment or some other form of asset building.I fully recognise that some people will see this as an unacceptable socialisation of costs borne by companies. But if the calculation is on a fair basis then there is not a direct subsidy. And of course many of the costs which companies face are themselves in reality social costs which have been imposed by government regulation. Moreover, I do not believe that the current position is sustainable. Something is going to have to adjust and could well lead to higher government costs anyway.

There is a second objection to the proposal as well. Whilst it will reduce companies’ total pension liabilities there are circumstances in which it might increase companies’ deficits in proportion to their assets. An example might help. Imagine you are a company with a £200m pension promise. Of this £100m is the cost of delivering the guaranteed minimum pension. You have £150m of assets, and therefore a deficit of £50m. If you pay the government £100m to take the cost of the guaranteed minimum pension off you then you are left with a liability of £100m and assets of £50m. Although the total size of the scheme has shrunk the size of the deficit relative to the assets has increased. This is one reason why the whole option should be voluntary. But the reduction in the total pension liability itself is significant progress.If the total size of the occupational pension fund promise is reduced, that itself could prove a great help in creating the condition for what is surely on its way – namely a secondary market in company pension promises. Just as Clive Cowdery and Resolution Life have taken life insurance products off the books of some of our major insurers, so there must be scope for company pension products to be securitised as well. Anything that brings these down to a manageable size increases the chances of the rest being manageable and marketable. Then companies really would be able to transform their balance sheets by taking the pension promise off them completely. Fine minds in the City are already working on such options. I believe this proposal would help make it more achievable.This idea is only being floated for discussion. It has drawbacks as well as advantages. It is certainly not the official position of my Party. But at the moment the pensions debate is wide open and it is important that we look at ways of helping British business tackle their deficits. The proposal is offered as something worth discussing to help with this problem.

Conclusion

I would love to believe that British company pension deficits were going to cure themselves as a result of slow improvements in equity markets. It is just possible that that will happen but it is unwise to plan on that basis. The world’s two major economies with significant company pension promises – America and Japan – have both got in place mechanisms to help companies with these deficits. In America there is easy access to Chapter 11 protection and an under-regulated Pension Benefit Guaranty Corporation taking over pension schemes in deficit. In Japan there is the option of paying the government to take a significant part of the pension promise off the company’s balance sheet altogether. In Holland, which matches us in terms of pension assets as a proportion of GDP, there is much more scope for cutting the value of the pension promise. Britain is unique in having almost no safety valves in place. The only exception is the ability of the PPF to cut the value of pension benefits if they wish. I believe we need to look much more radically at ways in which company pension deficits can be reduced. If companies are able to pay the government to take back the obligation to pay a guaranteed minimum pension then this could be a significant step forward in capping their pension costs. If not then we face years of corporate under-performance, probably leading eventually to some sort of state bail-out. If we don’t want zombie capitalism we have to look to bold reform now.”