Jill Kerby

Costly Pensions board should take early retirement

With the Department of Finance firmly in control of all policy matters regarding pensions especially the survival of tax relief on contributions is there any point to the continuing existence of the Pensions Board?

The Board costs over €6 million a year to run, over half of which goes to its 38 staff in salaries and defined benefit pension contributions and for director’s fees. It has a number of responsibilities, one of the most important of which is to advise the government on pension policy issues.

Last week at the launch of its 2010 annual report, the Board’s chief executive Brendan Kennedy said that they provided the Department of Finance with technical information regarding the pension levy that was introduced on 11 May, which will see up to €1.8 billion confiscated by the state from the savings in private pension funds only.

Kennedy, who earned €192,356 in pay and pension contribution, again refused to say whether he or the board advised the Minister for Finance one way or another about this levy.  I too had been told by his spokesperson last May that the levy was a government policy that had nothing to do with them.

There is now one government department calling the shots about pension provision and it answers to the state’s paymasters in Brussels, Frankfort and Washington.  You can be sure they care deeply about their own hugely valuable pensions, but they don’t give a toss if you ever retire

The short termism of the Department of Finance’s hasty, ill thought out raid on private pensions is breathtaking:  the hundreds of millions they will secure through the levy and by reducing the tax relief incentives on pensions will temporarily plug one small crack in our crumbling fiscal dyke. 

By 2014, however, when the higher rate tax relief is gone - along with nearly €2 billion worth of pension savings – we will be left with fewer pension members, the closure of many more occupational pension schemes and whatever about any new jobs created by the Jobs Initiative, plenty of job losses in the pensions industry.

Pension coverage has been going downhill for years – 43,400 fewer people were in a pension scheme last year than in 2009 - despite the millions that the Pensions Board has spent trying to encourage women, the low paid, contract and part-time workers in particular to save for their retirement and for employers to set up flawed PRSA schemes for their employees.

The Pensions Board is now just another expensive office full of bureaucrats with a very mixed record of success and one last role:  to make sure existing pension schemes don’t break the mountain of overly complicated and expensive rules and regulations it helped create these past 25 years.

Since the Department of Finance has decided that private pensions are now a luxury and existing pension funds are cash cows to be milked to pay off the state’s creditors, the Board should be integrated into the offices of the Central Bank and Financial Regulator, which already supervises and regulates all non-occupational pension schemes.

Having no opinion on the government’s assault on the private pension savings unlikely to be missed.

No Credit here

The Irish Brokers Association says we need forbearance measures for unsecured debt, and not just for mortgage arrears.

Too many people, says their chief executive Ciaran Phelan are being “pursued to the bitter end” by credit card companies and the banks that extended them personal loans and which can pursue their outstanding debts with little or no restriction.

Intimidated, these poor consumers, says Phelan are paying off these unsecured debts instead of their mortgages or even putting food on the table. It’s a case of “who shouts loudest… gets paid first” even though the two sorts of debt are all part of the same problem.

The Financial Regulator is considering ways to curtail the over exuberant collection methods that unsecured creditors are using – like constant phone calls and red letters, but this nasty game of financial musical chairs the IBA have highlighted is only going to get worse until a proper system of personal insolvency resolution and bankruptcy is introduced, supposedly early next year.

I doubt if the Regulator will introduce a formal code of arrears forbearance – like the mortgage one - for unsecured borrowers.  Instead, perhaps both the IBA and consumers need to be reminded that it’s called ‘unsecured’ lending for good reason: you might have your car repossessed or the wide screen telly if you can’t repay your motorloan or credit card, and your credit record will be seriously impaired, but you won’t lose your house.

In the short term, perhaps  members of the IBA could donate a few hours every week to help the money advice and budgeting service, MABS, spread the word about the need for proper debt management. 

Growing Pains

Last weekend, the Jack & Jill Foundation, which assists families with seriously ill children, some of them with intellectual disabilities, took over the grounds of the Royal Hospital, Kilmainham for their annual family fun day. It was a wonderful – but also a very poignant and moving event.

On Monday, Down Syndrome Ireland and the solicitor’s Pearts happened to send me a booklet they’ve just launched for parents of children with intellectual disability, ‘Planning for the Future’.

This is a terrific guide for any parent with child who will be unable to look after their assets in the future, and it covers all the issues that I know are always at the forefront of such a parents’ thoughts: how can I best provide financial for this child and any others in the family; how do I nominate guardians and trustees; what the are tax issues we must contend with.

The booklet costs €10, and can be ordered from www.downsyndrome.ie.  While you’re at it, send another tenner or even your old mobile phone to www.jackandjill.ie

Tell us how much it will cost to turn on the tap, Mr Hogan

It is very unlikely that our jails will be filled with water rates protestors this time next year, despite the belligerent stand that so many people were taking when they called into afternoon radio programmes like Liveline last week.

No one – not even well off citizens in functioning democracies – like to pay for the provision of water or for sewerage treatment or rubbish collection. Nearly everyone thinks these services should be ‘free’ because they already pay taxes or they think that someone else – someone more wasteful or wealthy than they are - should pay.

Minister Phil Hogan’s reiteration about the need for us to pay for and conserve water was nothing more than a way to soften us up to the reality of the new flat water charge which he plans to bring in from next January, even before the installation of meters.

Water, and let us not forget, property charges, have been well flagged in the Commission on Taxation report in 2009, the 2010 National Recovery Plan and budget and the coalition programme for government, but where he fell down badly last week was in not providing any idea of the water costs we might have to pay.

Instead, all sorts of figures were being bandied about – probably none of them accurate and I suspect most to be far off the real mark. Hogan’s vague hints about a ‘generous’ free provision of water only irritated Liveline’s listeners and infuriated the bloggers and tweeters.

The 2009 Commission on Taxation report did have a few concrete things to say about domestic water charges however.

In 2007 Irish people consumed about 160 cubic meters a day, compared to 116 cubic meters in Germany and 126 in Denmark. In those countries there is no free water allocation to househoIds and they pay the full delivery cost, which is what the Commission suggested we should pay.

Free allocation, it said, would be “fraught with difficulty. Setting a relatively generous quota would do little or nothing to encourage water conservation. Setting a low quota, or giving a number of units per member of the household, would present huge administrative difficulties. We concluded that it is preferable to have no quota in place and that those on low incomes could be dealt with through a waiver system.”

So what is it to be – a free allocation or no allocation?  And how much higher will the unmetered water bill be per household, if all the people who want to be exempt - the unemployed, social welfare recipients, the elderly, the working poor and those struggling to pay mortgages – actually qualify for a waiver?

Last weekend my brother in law and his Danish wife were visiting from their home in Odense in Denmark.  Their metered water bill for their two person household (their children are grown) is about €250 a year for water usage and another €250 charge for waste-water disposal.

The meter installation budget for 1.2 million households is expected to be over €500 million. I contacted the biggest provider and installer of water meters for commercial users in Dublin and asked them how much it would cost to buy and install a water meter in a domestic residence. 

“About €50 for the hardware”, but much more to connect it to the network and install it in the dwelling,” I was told. “I don’t suggest you buy one independently. It might not be compatible with whatever meter system is introduced.”

So much for thinking I’d accurately monitor our water consumption rather than just have to put up with an arbitrary charge next year. 

We’re only six months away from another brutal national budget so it isn’t unreasonable to ask the government to flag the water and property charges before then.

If the Government leave it to Budget Day they shouldn’t be surprised if our tempers are even more frayed than they are right now.

Dig deep for charity

Over 40,000 women ran last week’s Flora Women’s Mini Marathon with the same good humour and sense of fun that they do every year, but maybe with a greater sense of urgency: charities are struggling, just like the rest of the economy.

We’re  told that while volunteer labour has been going up since 2008, actual cash donations are down and it’s getting more difficult to deliver existing services.  What I didn’t know until I came across a report commissioned by the Irish Charities Taxation Reform (ICTR) group in 2009, is that of the €792 million raised by Irish charities that year, a shocking €460 million was donated by the state. 

That doesn’t auger very well for the beneficiaries since all official state spending is also being cut.

The ICTR would like a 2009 Taxation Commission recommendation to reduce the minimum amount on which tax relief can be claimed – from €250 to €100 – to be implemented.  Ideally they would like all donations to be tax deductable but that is even less likely now than two years ago.

The impact of the economic downturn on Irish charities has been underestimated, mainly because so few people realise how dependent they are on the state. 

If even more hardship is to be avoided, donations have to increase and that means more structured giving by everyone – by setting up standing orders and remembering them in our wills. 

Forget the mawkish ad, life cover is vital for parents

Irish Life’s has a new advertising campaign aimed at parents who should be buying life insurance: a young man reminisces about how he didn’t always take his dead father’s advice when he was alive, but how his own life has turned out pretty well because his parent had the foresight to take out an Irish Life protection policy.

Everyone I’ve asked about to about the advert shares my view – that it’s mawkish and maudlin.  One suggested that “it looks like it was produced by the same mind that came up with that horrible ISPCC ad about child abuse.”

Irish Life defend their new advert on the grounds that the feedback they received from focus groups showed “there is a lack of awareness and information out there for families on the importance of protection” and that the message needed to be a strong one if it wasn’t to be lost.

I couldn’t agree more that life insurance is probably the second most important form of financial protection that a parent can provide for their dependent children (having a good job is the first). The financial hardship that can happen when a parent dies prematurely is something I experienced as a teenager when my own father died, aged 50, leaving only an inadequate death-in-service benefit to support his family.

I think a more honest, straightforward message reminding parents of the risks they take by not having the appropriate amount of life insurance in place and how genuinely affordable the cover is – as little as €15 a month for €100,000 of insurance for 25 years - would be far more effective than the sentimental, soft focus claptrap that Irish Life seems to think will grab viewers attention.

It isn’t surprising that Irish Life is concentrating on life insurance for this campaign, which was preceded by a survey about people’s financial concerns if an unexpected death or serious illness were to strike.

High costs, poor investment returns; dodgy capital guarantees on tracker bonds and soon, the confiscation of pension savings by the government explains why the life companies are rediscovering the merits – to them – of promoting old fashioned and genuinely worthwhile products like old fashioned life insurance.

The margins aren’t as high as those produced by investment funds or pensions, but the industry only has itself to blame for systematically killing off that golden goose.

Buy life insurance. Your loved ones may thank you for it someday.

Yet another U-turn

Is there any end to the election promise u-turns that this coalition government has to make? 

The latest to be disappointed are parents and their college going children – again - who were told prior to the election by Labour’s education spokesman Ruari Quinn that there would be no re-introduction of college fees on his watch, and that he’d reverse the proposed €500 hike in the 2011 registration charge.

Did anyone really believe Quinn when he insisted that fees were gone for good? In this economy?  Still, there must have been a few Labour supporters who thought with their champion’s help, they might dodge the latest €500 hike which would otherwise see them forking out €2,000 for the 2011-12 college year.

So much for promises: the €500 hike falls due in September and Minister Quinn is repeating the government mantra that the country is broke and his hands are tied by his EU/ECB/IMF overlords, just like every other member of the cabinet, including Leo Varadkar.

He didn’t quite say that there will continue to be no money in the state coffers for as long as the €18 billion shortfall between money spent by the government and the revenue it collects remains and little headway is made on reducing the cost of the three biggest ticket items - public sector pay and pensions, social welfare payments and the health service.

The reality is that subsidized, let alone free, third level education – like heavily subsidized nursing home care for the elderly – was never sustainable.  It took just over a year for promised Fair Deal scheme to collapse and about 10 years for the free third level promise to be gradually withdrawn as registration fees were introduced.

Parents who want their children to have a college education have to start saving and investing from the time their baby is born. 

The £9,000 (€10,320) annual fees that now apply in England and Wales are probably as good a target to aim for as any if your children are still in primary school.

Best of a bad lot?

There are plenty of reasons why Nationwide UK Ireland is a popular deposit destination for thousands of Irish savers:  it offers very competitive demand and fixed rate deposit accounts; it is not owned by the Irish state, or the UK one either but by its members and it is regulated by the British Financial Services Authority, not the Irish Central Bank.  Its customer service is very good.

Nationwide UKs latest results are the other good reason why its Irish subsidiary should keep attracting worried Irish savers - it made a pre-tax profit of £317 million, and an underlying profit of €276 million last year, up 30% on the previous 12 months.

Do they pay their executives too much? Probably.  Do they share profits generously enough with its millions of member and customers? Probably not.

But its loan arrears are a third lower than the UK banking average, it has £189 billion in total assets, and has some of the highest capital and solvency ratios in the world.

The Nationwide UK building society emerged intact from the great banking crisis because it didn’t lose its collective head by discouraging savings and lending out more money than could be repaid. There isn’t a single Irish bank that can make such claims.

Theft of old age savings is the thin end of the wedge

The black propaganda coming out of the mouths of government ministers after the announcement of the four year 0.6% pension levy last week is the stuff of genius – George Orwells’. 

They have taken a leaf out of The Ministry for Truth guidebook in his brilliant novel, 1984: prudent saving by 800,000 members of private pension funds is now being depicted by the coalition as profiteering, because they received tax relief on their contributions. (This is taxation that will be repaid from their retirement income.) 

Meanwhile, the Big Brother politicians and civil service mandarins, whose pensions will be paid from the equivalent of pension pots worth up to €2.3 million, have arranged to exempt themselves from paying a cent for own pensions fund will be worth up to €2.3 million, and are paid out of taxation, are entirely exempt from paying a single cent.

Ministers are also justifying the levy on the grounds that pension fund managers were not patriotic enough over the years and invested too much in overseas assets.  Ironically, the same managers were previously condemned by the Pensions Board, the state pension regulator, for investing too much over the years in the tiny Irish stock market and for the catastrophic fall in Irish pension fund performance since 2007.

The Taoiseach and other ministers are also claiming that it will be the pension ‘industry’ that will have to pay this ‘modest’ 0.6% levy, but fail to mention that it is not the industry’s money that has to be paid. This is the actual savings, the deferred income of every pension fund member. Not a cent is substantial profits the pension industry extracts in fees, charges and commissions every year, even if the pension fund value drops for each of the next four years.

Why were they not also levied?

The government has crossed a dangerous line by targeting private savings, which do include those of the semi-state sector.

 The Irish Association of Pension Funds, which represents pension schemes, estimates that the ESB pension scheme will have to take at least €18 million a year or a total of €72 million from its members’ savings over the four years.

The average managed pension fund has delivered a disappointing 1.3% annualised return for each of the last 10 years because of poor asset allocation, stock market losses and high fees and charges. If members have to hand over 0.6% of the fund value and performance stays the same, it will reduce the return to just 0.7% a year, more than four times below the rate of inflation. 

Contrary to the ministerial spin, the common man’s private pension is very modest indeed.

The average member of a private scheme retires at age 65 with a fund worth an estimated €100,000. From this he can expect an annual private pension of between €3,000 and €5,000. If they qualify for it, they will receive the state pension of €12,000 for which they paid PRSI contributions as well.

The propaganda is already working on people who don’t understand the complexities of pensions, who can’t afford a pension, have no earned income anymore, work for the state and have been forced to take pay cuts and more in pension contributions or just think that all privately generated wealth is bad.

Perhaps they don’t care that the consequences of the levy (and the lowering of tax relief to the standard rate only) will hasten the end of private pensions and even cause considerable unemployment.

What might dawn on them eventually though, is that if the government can get away with stealing nearly €2 billion over four years from personal pension savings to fund what they claim is a good cause, they won’t have too many qualms about stealing another €2 billion from private deposit, credit union and post office accounts when the next good cause comes along.

 Since bank savings are no longer safe from confiscation (and not just a DIRT tax on interest) some people will be tempted to withdraw their cash from their bank or credit union and stuff it under their mattress. It will then be at risk from ODCs - ordinary decent criminals.

A better option to your mattress is to do what the really rich and insiders do (and even some politicians) and that is to legally open savings accounts outside this jurisdiction, or even outside the increasingly unstable eurozone.

Many advisors now suggest spending some of your euro savings to buy gold and silver coins. Even though some of us believe them to be real money, the government doesn’t. They look upon gold and silver coins held in private ownership to be a ‘good’, just like a suite of furniture or a picture you might buy to hang on the wall.

Once bought – and you don’t need to seek anyone’s permission to do so – the gold coins are yours alone and at least for now, are not subject to any levy or even capital gain tax unless sold for a profit, just like the three piece suite.

Since this financial crisis began, the vast majority of Irish people, to their huge credit, have been willing to pay the higher rates of income tax, social charges, levies and public service charges. Many still generously believe that our civil servants and politicians deserve to be amongst the highest paid in the world.

That may not last forever.

Germany calling  

The levy on private pension savings will only heighten the fear of many older people in particular about the safely of their life savings.

Thousands of people have already moved their money into non-Irish banks but if my postbag is anything to go by, many others would like to move some of their money out of Ireland altogether but don’t know how to.

One well known advisor, who asked not to be named for now because he’s fully committed to servicing his own client’s needs before taking on any news ones, has cracked that nut.

He’s made an arrangement with Deutsche Bank to facilitate his clients to open euro deposit accounts that will pay .5% on demand or 1.9% for one year fixed and to purchase German government bonds. 

He is charging a flat fee of €450-€500 on minimum sums of €200,000 which will be outside most people, but not well off pensioners or professionals with life savings. This cost, he says, works out at least as much as they would have to pay for return flights, accommodation, and translators, even if they could make their own banking arrangement.

Credit unions have chance to be lenders of first resort

The Irish credit union movement has been handed an opportunity of a lifetime:  to fill the gaping hole in retail bank lending and to become a genuine force in providing affordable, accessible banking services. 

That it is now fully cooperating with the Central Bank in the establishment of a statutory regulatory framework for the credit union sector is about the best news anyone who has been turned down for a modest personal or commercial loan will have all week, and anyone who doesn’t have a credit union account should be hightailing it to their neighbourhood credit union to start the very simple process of becoming a member. 

This doesn’t guarantee instant credit, but it begins the process of becoming eligible for some, which is more than being a customer of AIB, Bank of Ireland, PTSB or the EBS can offer these days.  

It was never in the interest of the hundreds of thousands of existing credit union members for the ILCU to think they could avoid more vigourous regulation, especially since credit unions have not been immune from the economic downturn. 

Some credit union lending committees made the very same mistakes that high street bankers did – they lent too much money for property purchases and ‘lifestyle’ loans and were not always as careful as they should have been about stress testing the repayment ability of their member/borrowers.

That said, existing credit union legislation put a ceiling on the volume of lending a credit union could make and the regulators in the central bank appear to have intervened soon enough at some of the bigger credit unions that got themselves into trouble to avoid a complete melt-down. 

Ensuring the adequacy of reserves and other support mechanisms is what is behind the closer cooperation between the Central Bank and the credit unions, but once that is in place, the way is open for the credit union movement to develop into a much needed community banking service.

It’s only going to happen though if the common geographic community is expanded and tiny credit unions merge with nearby smaller ones which in turn merge with the more substantial ones.  They can then take advantage of their greater size, improve their technology and expertise and offer the standard services that frankly, anyone under 60 today expects of any institution into which they lodge a paycheque or pension:  access to an ATM and debit card, internet bill payment and cash transfers, as well a competitive deposit rate and lending facilities.

In other countries with strong professional credit union movements this is the norm and credit unions are popular and yes, even profitable, all the while holding onto their reputation for honest, decent, accessible providers of credit and safe harbours for savings.

The conclusion of the talks between the regulator and league and the introduction of legislation to make it so here can’t happen soon enough.

A sobering thought

 “Go easy, now,” said my friend, when I mentioned that I might write a comment about the research findings Aviva Health has published as part of Alcohol Awareness Month. “There is great merit in drinking…” 

 I’ll take his word for that – he’s certainly not an alcoholic and like everyone is finding life a bit taxing these days, pun intended.

 If you are typical Irish male, however, Aviva’s survey of (over 20,000 people over the past two years and five months) shows that you are spending €2,395 a year on alcohol and it you are a woman, €1,607.

 Since half those surveyed are drinking below those values, it sounds as if there are an awful lot of people – couples even – who could be making serious inroads into their credit card bills or significantly beefing up emergency savings accounts if they even cut their booze consumption by half.

 These figures also suggest that it isn’t just their bank statements that may be suffering.

Men are consuming an average of 15 units per week and women 9, which is below the guidelines of 21 and 14 respectively – limits at which point actual damage is being done to the person’s health.  

 The biggest drinkers are in Dublin and Louth.

Last year Aviva did a similar survey about smoking, with the very disturbing finding that smoking is on the rise, especially among young women. Anyone smoking a full-price pack of cigarettes a day – at c€8.50 I am told – can subtract another €3,100 off their personal balance sheet.

Flaws in the equation

The new National Consumer Agency (NCA) on-line mortgage rate change calculator (see www.nca.ie) is a handy, simple tool for the PTSB tracker borrower in particular who is thinking about taking up that 10% bonus payment offer if they make a minimum €5,000 overpayment to their outstanding balance.  It show exactly what the impact will be on monthly repayments and the total cost of the loan. (It also shows the impact of regular monthly overpayments.)

Unfortunately the calculator isn’t much use to anyone who wants to see the impact that shifting to a fixed rate for a few years will have. This is too bad since many financial advisors are encouraging borrowers, if they can, to fix their repayments before the ECB base rate goes any higher.

 This is the third calculator on the site, but the NCA might want to consider adopting the calculator on the www.thisismoney.co.uk site that does calculate the impact of fixed interest periods. Meanwhile Irish fixed rate borrowers can use the data by just substituting the pound sign for the euro.

‘Permission-to-live tax’ lets the reckless off the hook

Just because an election promise is made not to raise income taxes, doesn’t mean it won’t happen. 

If the money has to be found, the new government can always call the new revenue something else.  Here in Ireland we have a tried and tested definition - and it’s called ‘a levy’.

Last week, a proposal to introduce yet another levy to pay for the €620 million state bailout of Quinn Insurance, currently under administration, was leaked. It has been suggested that a levy of between 1%-2% will be charged on general insurance policies like motor and home cover on top of using funds in the Insurance Compensation Fund of just €30 million.  The levy could last up to 10 years.

Taxpayers are naturally wondering why they should be penalised for Sean Quinn’s reckless gambling on Anglo Irish shares, which has resulted in his business being taken into administration and now being sold off.

This is now the way the losses of too large fail private banks and corporations are being dealt with by the government, no matter how much further such socialised capitalism drives the state into insolvency.

We’ve been here before:  the collapse in the 1980s of the PMPA and ICI (Insurance Corporation of Ireland, by then owned by AIB) resulted in a decade long imposition of levies on all insurance customers.  They ended by 1993, but a 3% levy is still in place on non-like insurance contracts.  A 1% levy applies to all life assurance investments or protection policies, while the 2% health levy and 1% income levy are not subsumed, along with PRSI, into the new 7% Universal Social Charge.

Health insurance members now pay a flat €205 levy per adult member and €66 per child  to subsidise the loss-making state health insurance company VHI and the Revenue is intent on now collecting the controversial €200 parking levy, which employers who provide a parking spaces for their workers must pay, or pass onto their workers.

Meanwhile, the government is understood to be considering imposing a 0.5% levy on the value of all private pension funds as a way to pay for its new jobs creation programme. This would cost every retirement saver with, for example, a €200,000 accumulated fund, €1,000 every year.  (Such a fund, incidentally, will produce an annual income of about €10,000-€12,000 a year.)

If the additional 2% levy is applied to all general insurance contracts (and not just car and house cover) and the pension levy is also introduced, someone earning €50,000, could end up paying over €3,000 a year from levies on typical house, car, payment protection, travel and life insurance contracts, USC, private health insurance (for themselves and one child), a work-based parking place and a pension fund worth €200,000.

Levies fall between direct and indirect tax and are just as surreptitious as the latter.  But if you drive a car or own a mortgage, you have no legal choice but to buy the accompanying insurance.

Life insurance is not a luxury if you have young children nor is a pension fund if you believe like I do that all state pensions are already unsustainable.

To paraphrase the Austrian School economist Frank Chodorov, ‘a levy is nothing more than a permission to live tax’.

Negative thoughts

Only a trickle of people, mostly young couples, spend their weekends traipsing through show houses anymore.

With mortgage loans so difficult to secure, estate agents admit that many are just curious to see how low prices have fallen.

They know – and so do lenders - that some gloomy commentators suggest prices here could fall by another 30% before the bottom is reached. If that prediction comes true, even the luckiest, most prudent borrower with a substantial down payment, who buys now, could find themselves in negative equity.

Nearly a year after some lenders were first prepared to advance negative equity mortgages – a move that was quickly discouraged by the Financial Regulator – the idea has been resurrected as a way to help unlock the frozen property market.  It means people who are able to meet their existing repayments, but need to move to secure new employment or to accommodate a growing family, can sell their properties and move on with their lives.

This time, if it happens, the lending conditions are expected to be much tighter.

For example, a person with an existing mortgage of €300,000 on a house worth just €200,000 would be able to secure a new loan of €300,000 but only if they bought a new property of say €200,000.  If it cost €250,000, they would have to raise the additional €50,000 themselves.

Finding an appropriate new property at the lower price might be difficult for someone needing more space, but it might be feasible if the person was moving outside of Dublin where €200,000 buys a lot more house than it does in the capital.  Either way, the lender’s intention is going to be to limit the opportunity for the borrower to fall further into the red.

Without some provision to carry negative equity with them, thousands of young families and productive workers will be stuck where they are.

I know someone who wants to move back to Dublin for work reasons, but is reluctantly going to have to turn herself into a landlord – because her lender will not allow her to sell her house that is in negative equity. 

“I had a buy to let apartment a few years ago I was able to sell at a loss two years ago, and I hated being a being a landlord. Even then, tenants were demanding rent reductions every six months and I’m told it’s worse now.”

Negative equity mortgages could work on a case-by-case basis especially if they are taxpayer neutral and avoid any risk of moral hazard.  

The Regulator is keen that lenders don’t dangle them in front of borrowers in exchange for them handing in their valuable tracker loans – there’s no evidence to suggest they are willing to write off negative equity – but I expect there are plenty of mortgage holders who would willingly cut a deal if they could be clear of their equity shortfall.

Bank must be flexible if it wants to eliminate trackers

 Overpaying your mortgage has always been a good idea and I speak from personal experience. When we bought our current house in the mid-1990s, the interest rate was about 11%, but it quickly fell to 8%.

Instead of letting our repayment fall with the new, lower interest rate, we instructed our lender to leave it as it was.  It dropped to 6%. By 2002, the rate was even lower and we were on schedule to clear the entire, 20 year loan in just 12 years.

The size of our mortgage was a fraction of what most Permanent TSB tracker mortgage holders have, so the bank’s offer last week of a 10% bonus payment if borrowers agree to pay at least €5,000 off their trackers by June 17th, is unlikely to have same dramatic effect as it would have had on our comparatively modest loan.

However, the principle is the same:  by paying off €5,500 early, you avoid paying interest on that sum for the remaining term of the loan and you not only reduce the term of your loan, but its total cost.

PTSB is not making this offer for your benefit, of course. The trackers are a serious loss leader and the sooner they can reduce this part of their loan book, the sooner they will stabilize their fragile balance sheet. 

Where I think they have been shortsighted is in limiting the offer to multiples of lump sum payments only and to a starting sum of €5,000. 

Who, amongst their mainly younger, often first-time buyer customers, has a spare €5,000, let alone ten or 20 thousand euro lying around?

I suspect there are many more tracker holders who could overpay their loans on a monthly basis by €100, €200 or €300 a month. Why not allow them commit to overpaying their monthly repayments and then reward them at the end of the year with a further 10%?

Someone suggested that the short-lived deal is a sign of desperation on PTSB’s part. This may be so, but with 70,000 expensive trackers on their books, you’d think they’d be incentivising overpayments, no matter how modest.

Finally, many people who don’t bank with PTSB are wondering if their lender will follow their example and buy them out of their tracker, or better still be prepared to write off parts of their loan.

This idea, and widespread debt forgiveness for people in serious arrears has been overblown lately.

An AIB branch manager that I spoke to after CEO David Hodgkinson’s comments on April 12 about debt forgiveness for people in serious arrears, said the first he heard about it was on the radio just like the rest of us. 

“We’re going through files one at a time and I don’t expect that to change.”

Not worth the paper

What is the soaring price of gold and silver telling us? 

At over $1,500 and $45 an ounce respectively last week, how about that paper and ink banknotes, especially the ones with dollar, euro and pound signs are an unreliable store of value.

By the time you read this, the cost of gold and silver may have fallen as investors take profits but every price fall is a buying opportunity for anyone who shares the view that unlike fiat currency, gold and silver cannot in themselves be debased or printed out of thin air at the whim of politicians and their creatures, central bankers. 

The world’s sovereign, institutional and private lenders are beginning to wake up to the fact that the only way they will be repaid the tens of trillions they are owed by indebted governments – like us, but especially the United States - is with inflated, devalued paper currencies or not at all.

The Chinese – who are the biggest lenders to the US, and are very worried about rising price inflation, are encouraging their people to exchange a portion of their savings for gold.

Last week the $19.9 billion University of Texas Investment Management Fund, the second largest such endowment fund after Harvard, exchanged nearly $1 billion for 6,643 gold bars.

Hardly a vote of confidence for the paper dollar.

Gold and silver is real money. You exclusively trust paper banknotes at your own peril.

 In poor health

I had to laugh when I read how the VHI is now describing itself as the only ‘not for profit’ health insurer in the market.

That’s because it keeps making losses - €3.1 million in after tax losses in 2010 and €41.7 million in 2009.  It also lost €147 million on its older members, a sum that was only made up by the controversial health insurance levy subsidy that it gets from all adult and child Quinn Health and Aviva Healthcare members.

The levy went up 16% last December to €205 per adult and €66 per child and is nothing more than a tax to help bailout the VHI.

The Minister for Health is now talking about breaking the VHI into three parts, selling off two of them and keeping state ownership of the third part.

Whatever about the government holding onto a loss-making operation – nothing new there – he might want to address the problem of overstaffing, civil service pay rates, the defined benefit pension scheme it operates, its inadequate reserves and the six VHI offices that it still operates around the country, before the insurer is sold off. 

The VHI is a ‘not-for-profit’ company for many reasons, and none of them have been adequately addressed.

Failure to regulate private debt agencies will be costly

 The politicians are going to be arguing endlessly about how to get the banks recapitalised and our debts restructured, including mortgage arrears and negative equity. 

 This is because talk is cheap and it lets them postpone and avoid – for now - the tough choices that will have to be made eventually, probably by our IMF and EU masters if the latest reports of how the economy continues to weaken are correct.

 Meanwhile, real people who are carrying these great personal debt burdens - €180 billion worth -  are worrying themselves sick and in worse cases, ending their lives, as they juggle credit card bills and car loans, mortgage and utility payments, according to the results of a survey undertaken by the private debt management company MoneyVillage (www.moneyvillage.ie).

 It found that over a third of people surveyed hadn’t shared their debt problems with their spouse or partner or any other family member and nearly half would be reluctant to approach their family for financial help. Nearly a third said they knew of a close family member who was also under financial stress due to debt.

 The Law Reform Commission report on personal debt management and debt management was published last December year and remains the only template the government has to put a workable personal insolvency and bankruptcy procedure in place.  Bankruptcy reform is one of the conditions of the IMF loan deal. 

 It has to be fast-tracked on humanitarian grounds, if nothing else.

 Until then, anyone who isn’t keeping all their debt balls in the air should consider not just going to MABS, the state money advice centre, but the services of a reputable debt management company, which, for a transparent fee, helps renegotiate your debt repayments and debt forgiveness with your creditors.

 MoneyVillage director Eugene McDarby, who is also head of the Debt Management Association of Ireland which represents a handful of firms is leading the call for proper regulation of their industry by the Financial Regulator, without much success, he says.

 The Law Reform Commission acknowledges the need for private debt management agencies as part of their debt management process. The demand is clearly there and private companies are springing up, the majority of which are not members of McDarby’s self-regulating association.

 Have we learned absolutely nothing from the last few years?

 Teething problems

 Knowing how much it will cost before you commit yourself to a series of dental treatments sounds just like common sense to me. 

 It has taken years of debate and consultation between dentists, their representative body and the Department of Health, but a code of practice for Irish dentists was finally introduced last week. It will be policed another arm of government, the National Consumer Agency.

 The only reason I can think for the dentists - and GPs before them - resisting this simple, obvious, pro-consumer development, is that, as professionals, they didn’t see themselves as service providers, no different in the wider scheme of things than garage owners or hairdressers.

 But dentists and doctors provide a service just like the tradesman/mechanic who services my car once a year and tends to my motoring emergencies, offers a range of relatively simple, ordinary services as well as more complicated and even emergency-based ones. I respect and admire such skills, but knowing that they don’t come cheap, I buy health insurance, which like motor insurance, pays for exceptional events.

 I know dentists are very unhappy that the PRSI dental benefit has been decimated, but like medical card payments to GPs, they skewed the real price of the service. It is no co-incidence that dental prices in many practises have fallen since the PRSI subsidy has disappeared.

 Price lists are always a good idea because it helps the patient/customer decide whether the service or treatment represents value and it forces the dentist to set their prices based on the real market and how much real patients can pay – and how often - in this depressed economy. 

 The medical card subsidy means the prices GPs charge don’t fully reflect reality, but having a list up on the wall is still worth having, at least until they all become government employees under the Department of Health’s proposal for a state-run universal health insurance system to replace the HSE.

 God help us all then.

 Bank on foreigners

 Most commentators are pretty certain that fewer Irish banks means less competition for affordable mortgages, personal loans and overdrafts. 

 The worry, they say, is that interest rate increases won’t be passed onto savers.

 That may be true of the Irish banks whose needs to recapitalise are precipitating every decision they take at the retail level, but maybe there’s still some hope of fair play:  when the ECB rate went up a fortnight ago, the Danish owned National Irish Bank immediately announced it wouldn’t pass it on.

 A few days later, the Dutch own deposit bank, RaboDirect increased their savings rate by 0.25%.

 The grotesque competition the Irish owned banks pursued is gone. Until they are sorted out, do your business with the real competition.

We haven’t hit rock bottom yet in the property market

House prices in Ireland are still falling, reports the latest Daft.ie price survey, just not at such a brutal pace as we’ve experienced in the last couple of years.

It would be great if the property price bottom was really in sight – they are down another 3.1% over the last quarter, but I think there’s more downside to come, and that also seems to be the view of Eoin Fahy, the chief economist for Kleinwort Benson Investments, who wrote the commentary that accompanies this latest survey. 

The great first wave of dramatic price falls is over, he suggests, but the second down wave could be on its way, this time directly related to the number of defaults and repossessions that are happening, and the hike in interest rates from the ECB and lower value loans, when the banks do start lending again.

There is a theory that every financial correction is equal and opposite to the deception that preceded it.  Professor Morgan Kelly of UCD, who predicted the great property bubble collapse, subscribes to it and so do I: a mere 45% average fall in prices since 2008 suggests that there is some way to go in my Dublin city neighbourhood where houses that were sold for a million euro at the height of the boom are remaining unsold at less than half that price.

Confidence will really only return when houses like mine are genuinely affordable again to people who aren’t worried about the security of their jobs or their savings and the banks are functioning normally.

Meanwhile, two readers, pointed out that I missed an important point last week when I was commenting on the ongoing risks some parents take by going guarantor on their adult children’s mortgages.

“I didn’t go guarantor a few years ago when my son asked for my help because I thought the asking price for the house he wanted was ridiculous,” Mr RD from Dublin told me.  “We’re all glad it didn’t happen, and today he not only has more money for his downpayment, but the risk I would take in going guarantor would be much less too because the asking price is half what it was three years ago.

“Unfortunately, the bank isn’t letting parents go guarantor anymore, and even though he doesn’t even need my help, they say they won’t lend him the money now because they don’t think his employment is very safe.  You can’t win.”

A Waterford reader, Mr KW says that a more sensible approach, “is to go in as a joint buyer. 

“What’s the point of going guarantor if you might end up the owner.  I’ve told both my children that if they are really stuck I will consider buying a quarter or maybe a third of their starter house with them.  So long as they don’t lose their job, this arrangement should make it easier for them to make repayments, especially now that prices have fallen so far.”

Shrinking savings

One of the reasons some of our European neighbours are reluctant to forgive us our debts, or even reduce the interest rate they’re charging us on the billions they’ve loaned us, is that they think we all pay ourselves too much. 

They say we pay less tax and social insurance than they do, that our civil and public servants make more than theirs – and take more holidays - and that our social welfare payments are higher than theirs. 

Even middle class welfare is higher here, they say, with Irish parents paid €140 a month (€150 last year) for the first child compared to €100.40 in Finland, €147 in Germany, (in the form of tax credits),  €110 in the UK and just €11 in Poland. (The figures come from 2010 OECD Family Database 2010.)  

That our cost of living and personal debt is higher cuts no ice, and it’s our own fault we didn’t sort out the child-care problem during the boom years when the money was available.

With this kind of subjective ammunition being fired at us, let’s hope the Germans, French and Finns don’t stumble across the latest Central Bank figures on our household savings, which now amount to over €93.2 billion or nearly €22,000 per man, woman and child.

With this kind of money resting in our deposit accounts, and the state-owned banks paying unsustainable 3.5% interest rates, our European friends may suggest we start using our savings if we find the existing EU/IMF debt package too expensive and we’re unwilling to balance our national budget.

They have a point – senior civil and public servants are paid more than their prime ministers, let alone our own, but since last September, household savings here have fallen by over €3 billion from €96.22 billion to €93.25 billion.  Since January over €700 million has been drawn down. It hasn’t all flowed out of the state to safer banks; the bulk is being used to meet day to day bill and the shock of the new universal social charge (USC).

If that rate of depletion continues over the course of this year, the state household nest-egg will be worth €8.4 billion less.

Give us an Irish Isa

Some day, when the bank and debt crisis is over – there’s no harm in a little optimistic thinking – and we become a normal society of prudent savers and careful spenders again, whoever is in charge of the Department of Finance should consider the merits of the excellent Individual Savings Account or ISA that our British neighbours have enjoyed for many years.

The UK  2010-11 tax deadline for choosing a cash or stocks and shares ISA has just passed but the limit that you can save, entirely tax free for 2011, has been raised to £10,680.  Anyone over the age of 16 can put up to this amount of taxed income or earnings into an account for as long as they like and will pay no tax on the return.

As tax relief on pension contributions is tightened both in the UK and here, the ISA is expected to become a viable alternative to expensive, complicated pension plans, especially for the self employed or workers whose (few) employers don’t contribute to PRSAs.

Introducing an ISA would certainly be a quick solution to the uncertainty surrounding the funding of personal pensions at the moment.

Parents guaranteed to run into trouble with mortgages

A repossession case before the Commercial Court last Monday will put the frighteners on many parents who are guarantors on their adult childrens’ mortgage loans and whose own homes have been committed as the loan security.

The case before the Court last week was a bleak one: the couple had allowed their son to remortgage their home with the sub-prime lender Start Mortgages for €154,000 in order to buy an investment property. He stopped making the repayments and allowed arrears of €41,000 to build up. He then disappeared, leaving his parents with a total €170,000 liability they cannot repay.  The judge granted the repossession, but gave them nine months to find alternative accommodation.

 This judgment, like most repossession orders, involved a sub-prime loan – a financial weapon of mass destruction if there ever was one – plus guileless parents who could not have fully understood the implications of their generosity, and a feckless child who has now vanished.  The only person who comes out of this with any credit is the sympathetic judge.

But what about all those other, ordinary middle class parents who went guarantor during the boom years on their child’s starter home or apartment mortgage when the high street lenders were only too happy to facilitate such arrangement?   Did they simply never imagine any situation arising in which they could be held responsible for this debt?

 For some parents whom I have met, their generous intervention was on top of an equity release loan they drew down against their own home and passed over to the child as an ‘early inheritance’ downpayment.

 Whatever about losing a €20,000 or €30,000 stake in a property that is probably in negative equity, the far greater worry must be what will happen if their child loses their job, or falls into arrears and the lender comes looking for the parent to honour their contractual commitment and pay off two mortgages – their own, and their child’s.

 Parental guarantees were as much a part of the madness of the property bubble as the multiple-salary loans and 35 and 40 year mortgage terms and some lenders – like the EBS, that launched an emotive television ad to that effect - cashed in on parental guilt.

 Instead of reigning in their lending, once such extraordinary lending measures became necessary to ensure loan ‘affordability’ for first-time buyers, the banks just slapped on more loan grease in the form of interest-only loans. They also disregarded the too-little-too-late mortgage stress-testing that the Regulator finally introduced.

It’s not too late to do some stress-testing of your own if you are such a mortgage guarantor and to act accordingly. By acting now you might avoid an ugly arrears problem later. You’ll finally be acting in your own interests and, for what it’s worth, have the gratitude of the bank that helped get your child into such debt.

Polls apart

There are plenty of consumer surveys that track how much we are saving or spending and most involve a representative sample of respondents. 

Last week’s Friends First  quarterly economic survey was particularly interesting because it concentrates solely on the 28 to 44 year olds, the age group that has been hardest hit by mortgage indebtedness, unemployment and emigration.

More than three quarters of those surveyed reported that their spending has decreased in the last year with 79% amongst the over 35s.  Eating out (89%), entertainment (88%) and holiday (71%) are the three biggest sources of cutbacks.  Nearly one in three said they’ve reduced the amount they spend on home heating. Nearly half of the 18 to 24 year olds reported that someone in their family has already emigrated.

With consumer price inflation and taxes both up it was no wonder that the Friends First economist Jim Power’s economic outlook for the rest of this year was so pessimistic.  Consumer confidence will only pick up, he said, once the bank and fiscal crisis is sorted out and jobs creation can begin.

Without a debt-sharing or forgiveness deal from the EU, that isn’t going to happen and more ominously, says Power, it could mean the end of the euro and eurozone.  “We’re in the end-game now,” he told me.

CityDeal or no deal

Since Christmas I have embraced two new trends – Twitter, which I am discovering is more of a time-waster than I can really afford, and CityDeal.ie which is all about cost savings.

I know some retailers are not happy about the large discounts they are expected to stump up to qualify for CityDeal, but I hope it survives.  I like a bargain as much as the next person and I’ve been purchasing the vouchers not just for myself and family, but as little birthday or thank-you presents because they are so affordable.

Where I think CityDeal works best is that it introduces new retailers and services to people who might not otherwise know about them.

I’ve changed hairdressers, found a new yoga class and a new bakery that makes the most wonderful large order cupcakes and am looking forward to taking two young neighbours to a falconry centre in Wicklow.  If that visit is a success it will go on my list of ‘things to do’ when the North American visitors arrive later this summer.