What Would They be Like in a Real Crisis?

The petrol crisis that wasn’t is reaching ridiculous proportions. Today the Telegraph tells us that

Ministers [are] under pressure to bring in emergency rationing as 999 crews struggle to get hold of fuel.

The tanker drivers are not on strike. Fuel supplies are normal. The “crisis” has been 100% caused by the Government panicking.

Yes, they are telling us not to panic. But we should all fill up our cars just in case.

Eric Pickles even claimed today that the country was in a “stronger position” as a result of ministerial advice on fuel, which had “worked reasonably well”.

They are pretending that their aim all along has been to encourage people to stockpile, to make the system more “resilient”. That is utter nonsense. In no way does transferring fuel from petrol forecourt tanks to drivers’ tanks increase by even a single hour the length of time the country could withstand a tanker drivers’ strike.

It is the Government themselves who are panicking. What a sorry shower they are. They would do well to ask themselves how it is that the tanker drivers, who after all work for a number of different companies, could be all threatening a strike at the same time and for the same grievances. Do their employers pay them all the same amount, and provide them all with exactly the same conditions of employment? Are the union and the employers possibly operating an old-fashioned cartel?

The Government should be asking those questions, not creating an entirely artificial panic over a non-existent crisis.

Career Average Pensions Use Inflation to Hit Employees

The BBC is currently in the middle of an industrial dispute over pensions reform. It is not often that I sympathise with a strike. But in this case, I do.

The BBC pension scheme has a huge deficit, and the BBC wants to cut back on pensions. Part of the proposals is to provide a “career average” rather than a “final salary” pension. And the BBC is not the first organisation to propose this.

This might sound like a pretty minor thing – yes, of course people’s career average salary is lower than their final salary in most cases, because they tend to get promoted and so on. The media have concentrated on this aspect of the change, and pointed out that high fliers would lose out (which is probably fair since under final salary schemes they get an unfair advantage).

But what about inflation?

The BBC’s “career average pay” will be enhanced by the inflation rate, but only up to a maximum of 4 percent per annum. And that means, quite simply, that people’s pension entitlements will depend on inflation. And not in a small way, either.

Bear with me while I go through the figures.

The current inflation rate is around 5 percent in the UK. And by the standards of the last few decades, that’s pretty low.

Let’s imagine that somebody works for the BBC for the next 20 years, starting at £20k. Imagine a strange world where there was no inflation, and that our mythical BBC employee stays in the same job and gets no pay rises.

This means, of course, that their career average pension would be based on the same salary as their old final salary pension would have been.

Now, imagine a more realistic scenario where the inflation rate stays at 5 percent over that period.

Presumably our hero would get a 5 percent pay rise each year, equal to the inflation rate (giving him a zero real pay increase).

With those 5 percent pay rises, after the 20 years, their final salary will be much higher obviously. In fact, their final salary will be £50,539. That sounds a lot, but remember, in real terms, it’s only equivalent to that original £20,000 in today’s money.

Now over the 20 years, their career average salary is £33,066. With that 4 percent uprating, the career average salary, upon which their pension is based, comes to £46,423.

Thus, if the pension accrues at the same rate as it used to with the final salary scheme, their pension will be reduced by 9 percent purely because inflation has been 5 percent over the 20 years.

And now imagine that inflation really takes hold, and runs at 10 percent over that 20 year period. (That is not an unrealistic scenario, given the quantitative easing we have seen recently and with more being considered.)

In that scenario, our hero’s salary at the end of the 20 years is £122,318.

Over the 20 years, his average salary has been £57,275 and his average with the 4 percent uprating has been £77,831.

In that (relatively) high inflation scenario, his pension has been cut by 37 percent – and just by inflation!

Of course, if he gets real terms pay increases each year, then his pension reduction from the move to the career average scheme will be even higher.

You can see from all this that career average pensions leave the pension scheme member completely at the mercy of the inflation rate. (Of course, that was always the case after retirement except in the feather-bedded public sector, with its 100 percent inflation-linked pensions. But at least with final salary pensions you weren’t at the mercy of inflation before you retired.)

Higher inflation can very rapidly destroy the value of a career average pension. But of course high inflation does not hurt the ability of the employer to finance the pension scheme – their business will inflate along with the rest of the economy. That 37 percent pension hit for the unfortunate hero of our tale is not matched by a corresponding hit for the employer.

Career average pensions give employers a huge incentive to welcome high inflation. That’s why we need to resist them at all costs.

If there is a “black hole” in a pension fund, then maybe lower pension benefits will be needed. But let that be done in a transparent way, by reducing the rate at which pension rights build up, or by increasing contributions.

An alternative, of course, is to move to money-purchase schemes, which are the norm now in the private sector. With those, the employee is at the mercy of the performance of the pension fund. But at least he is not affected by inflation, because the pension scheme assets will inflate along with the economy.

Career average pension schemes represent employers’ using inflation to cut back people’s pensions without their realising it.

British Airways and The Unite Union – Can They be Serious?

Industrial Dinosaurs: Derek Simpson of the Unite Union and Willie Walsh of BA

British Airways has won an injunction to stop the strike by cabin crew that was due to start today.

So who is in the right here, management or Union? The answer is clear. Both sides are 100% wrong.

It is obvious that striking against struggling BA is not in the long term interests of the crew. The strike can have only one effect – which is to damage the airline further. That in turn will cause further damage to the company’s ability to pay its staff, and mean that future deals on pay and conditions will be worse than they otherwise would have been.

The offer from BA, which the Union is opposing, contains measures that would be regarded as old hat in most companies.

They include:

  • Reducing the number of cabin crew on long haul flights from 15 to 14. Would those staff really not be able to cope with that 7% reduction in staffing?
  • A two-year pay freeze from 2010. That is now commonplace in many private companies (including the one I work for) and is about to be extended into the public sector.
  • New contracts for fresh recruits and newly promoted staff, which would introduce a single on-board management grade, promotion on merit, no seniority and pay at market rates plus 10%. Frankly, it is astonishing that old-style nationalised industry restrictive practices like seniority and “Buggins’ Turn” promotion have survived as long as this at BA. It is also amazing that the Union have objected to “only” being paid 10% above the going rate.

However, the Union claims it has now reached agreement in principle on all of this with the airline. The sticking point now is travel concessions, which were withdrawn permanently from staff members who took part in a previous strike, and some disciplinary action that has been taken against “more than 50″ union members.

Those remaining issues do not sound to me like major ones that couldn’t be resolved by talking, without a damaging and disruptive strike.

Assuming, of course, that British Airways managers are keen to resolve the dispute. They went to court to stop the strike on a pure technicality. The claim was that the Union did not correctly notify its members of the results of the strike ballot. It is often said that the law is an ass, and in this case, the court provided ample justification for that view by supporting BA. Stupid though the strike is, getting the courts to stop it on such spurious grounds is misuse of the intention of the law, and brings that law into disrepute. BA should be ashamed of itself for that.

BA should also consider the effect on its staff. Eventually the only way forward for the company is for the staff and the management to work together as a single team. One day they will have to do that. Will misusing the law to stop a strike, when a big majority of staff voted in favour, bring that day any closer? Or will it further alienate staff and cause more resentment and ill feeling?

Looking at those industrial dinosaurs battling it out with strikes and retaliation by legal action, while the company faces an uncertain future and long term decline, is profoundly depressing.

I am going to Munich later this year for a holiday. I looked at several airlines for our flights. Easyjet were the cheapest – no surprise there. Lufthansa were only a little more expensive than Easyjet, and the difference was easy to justify based on the additional service you get like allocated seats.

And BA? Their price was 50% more expensive than Lufthansa. Why would I or anyone else choose to fly with them on those terms? Because we like the pretty red, white and blue uniforms?

The Beneficiaries of the BA Dispute

If the Union don’t like the management’s cost cutting proposals, they need to explain how they believe those cost differences should be addressed. And BA management need to explain why they have allowed this lack of competitiveness to fester for so long, when the company has been in the private sector for more than 20 years.

Both the Union and BA management need their heads knocking together. They need to understand that their passengers owe them nothing, any of them. If their airline collapses, nobody will mourn. Their competitors will be happy to take their airport slots, and eat their lunch.

None of us care about the Union’s grievances, or about the management’s macho desire to break the Union. If they can’t resolve their differences, we don’t care. There are lots of other airlines that will be happy to fly us wherever we want to go.

If they want a place in our future, BA and the Union should do a deal and get back to work, together, fighting their competitors for the business of people like me.

Meanwhile, my money will be putting lunch on the tables of Lufthansa’s German crews.

Out, Out Damned Spot

Why Did I ever Get Involved with Those Unions, Sarah?

Gordon Brown has now waded into the row over the proposed strike at British Airways.

He said the strike would be “unjustified and deplorable”.

I would certainly like to see the strike called off myself. Some general comments from Mr Brown urging both sides to negotiate a settlement and avoid the strike would have been in order, given the importance of the company and the impact on the travelling public of a strike.

But Mr Brown should remember that British Airways is a private company. His government has not yet got around to renationalising it. Therefore he most certainly should not be taking sides in the dispute. And I can’t remember him showing any particular interest in other strikes that have occurred from time to time at other companies.

The real reason for Mr Brown’s excitement on this particular strike is its timing. When he says it is “unjustified and deplorable” he means an Easter strike would be an unjustified and deplorable interference with the start of his general election campaign. He is considering the nightmare scenario, for Labour, of headlines about stranded holiday makers just as Labour launch their campaign.

Yes, Labour’s Union paymasters are threatening to destroy their election campaign. Mr Brown’s nightmare of a repeat of the strikes that scuppered Labour’s campaign in 1979 is looming before him like the dagger before Lady Macbeth. The Tory trees are moving up the hill, and Brown’s day of reckoning is almost upon him.

I do hope David Cameron doesn’t choke on his cornflakes this morning through laughing. I don’t suppose he was born by Caesarean, was he?