Jill Kerby

With businesses closing by the week due to a shortage of capital is it any wonder that their owners are prepared to resort to desperate measures to stay afloat, from pay cuts and unpaid holidays to mortgaging their private homes (if they can) or even dipping into their own pension funds. 

 

Except of course, that in this country, this latter solution is not available to them. 

 

This week a reader from Athlone, who owns a giftware and jewellery shop has found himself in exactly this position – with a personal pension fund worth €150,000 but no access to the money under existing pension regulation, unless he retires.  Without the money, it looks like he might be retiring whether he likes it or not. 

 

Restricting access to pension funds was introduced in the Pensions Act 1990 and was a major reform at the time because up to them it was commonplace for people to cash in their pension savings when they left an employer.  Too often the money was spent, rather than re-invested in a new occupational or private scheme.  By locking in pension contributions and fund growth until retirement, the idea was that by default, the person would have some sort of financial security in their old age. 

 

That’s all very well when your job is secure, credit is available and the world isn’t sliding into the deepest recession since the 1930s. 

 

Aside from preventing an Athlone shopkeeper access to his own capital to save his business, the no-access pension rule has never been very helpful (even in good times) in the campaign to encourage younger people to set aside money now for an income they will only enjoy in 40 years time.  

 

Ironically, the state is now about to raid its own statutorily ring-fenced pension fund – the €16 billion National Pension Reserve Fund which is needed, says the government, to keep the ship of state afloat.  It wasn’t to be touched until 2025, said Charlie McCreevy when he set it up to help pay part of the pay-as-you-go civil service pensions bill. He knew then that the huge fund would always be a tempting source of capital to his Dail colleagues, hence the fence. 

 

It’s time to revisit the access restrictions that apply to the retirement savings of the rest of us. In the United States and Canada, where there is limited access to private 401k pension funds, it is perfectly reasonable for any money withdrawn from Irish pensions to be subject to the same level of tax it enjoyed on the way in. 

 

But other than that part of the money, the rest of it is the individual’s own, and not the state’s.

 

Pension legislation is beginning to resemble a Medusa’s head of hissing, tangled snakes as one problem after another arises in the current system.  Just ask anyone whose defined benefit pension has been wound up due to insolvency how fair it is that existing pensioners take priority over everyone else in the payment of retirement benefits.

 

Time is running out for the Athlone shopkeeper, and all the other employers and business people who are being strangled by pension policy and regulation that is no longer appropriate.  

 

They need pension reform now, not later this year or next year.  

 

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The only positive thing to say about the introduction of a property tax in this country at this time is that it will help accelerate the fall of property prices, and anything that does that is a good thing.  

 

I say this, not because I like the idea of my own house being worth less, but because the return of consumer confidence here – and in the other anglo-american countries that experienced huge price bubbles since 2001 – is so tied to the value of the bricks and mortar we own. 

 

Prices are still sliding, but the price bottom is a long way off because the volume of trading is so low. We need normal (and I don’t mean ‘bubble’ normal) levels of property transactions to resume before every homeowner can come to terms with the true size of their personal wealth and then get on with the personal decision of whether they can afford to return to the wider marketplace.  

That said, even if our house prices finally levelled off, the wider banking crisis would still hinder our recovery, but at least those people who have stable incomes and jobs, and are not overburdened with debt might feel confident enough to replace their car, or buy some new curtains or dine out again.  

 

My main gripe about the modest property levy on second homes that the government seems to be considering, is that it is so typical of the short term, piecemeal and utterly inadequate way in which tax policy is operated by this government.

 

There was never any clear thinking about the tax treatment and incentivisation of property here and we are now living with the consequences of not just our own mess, but the global banking disaster caused by the over-encouragement of the property industry in other Anglo-American countries. 

 

Aside from that one unintentional benefit (if you can call it that) the introducing of a property tax at a time when so many property owners can’t even meet their mortgage payments doesn’t sound like joined up thinking to me.    But that’s probably a lot to ask of our politicians these days. 

 

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Can anyone explain to me how taxis are so expensive when there are so many new licences still being issued and an alleged over-supply of cars?

 

Theoretically, when there are an abundance of goods and services, the price goes down. But not, alas, when the government decides the price of the service and also influences, in this case, the number of traders.  

 

A taxi-driver told me the other day that he was on a big demonstration recently demanding that no more taxi licenses be issued and a cap put on the numbers of drivers. 

 

The mistake, he said with a straight face, “was deregulating the industry and letting anyone to buy a plate.” But what about fares, I asked. They were never de-regulated. 

 

“Of course not, you couldn’t have that,” he said.  

 

I can’t wait to see how it works in the banks.

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“I think 2009 is the year that we all rebuild our balancesheets,” says a friend optimistically.  He says he’s quite hopeful that the worst of the credit crisis is over (he was able to renegotiate a loan back in December) and that his business – he’s a craft butcher with strong cash flow – is as recession-proof as it will ever be. 

 

He hasn’t had to let any of his staff go – yet, I think pessimistically to myself – but they’ve been with him for years and would accept pay cuts if necessary.  He doesn’t regret expanding his premises a couple of years ago.

 

And while he still stocks a fantastic selection of fine cuts of meat, Sheridan cheeses and the trays of stuffed olives and artichokes and semi-prepared meals that we all agree taste way better than anything Marks and Spencer’s can do - he also now sells great lumpy vac pacs of inexpensive cuts of beef, lamb and pork that many of us having got a clue how to cook.  

 

“I’ve got that sorted too,” he says enthusiastically.  “I’m adding interesting marinades to help tenderize the meat, and passingon some hints on how to cook it.”  I suggest he collect loads of great recipes for soups and stews, braised dishes and hot-pots, print them up and hand them out to customers…maybe with a free stock cube and a little bunch of herbs.  

 

He’s always been open to suggestions – hence the lovely (but expensive) range of fresh herbs and spices, veg, marinades and pasta, artisan yoghurts and ice-creamthat he also stocks.  But these items are now luxuries; cookbooks and baking pans that have been tucked away in sideboard cupboards and at the bottom of kitchen drawers for years are being dug out again as home cooking is rediscovered.

 

The great Irish butcher – the ones who as apprentices get A+ scores in their ‘how to flirt with your women customer’ classes -will always get my custom over the soulless drones that work behind the meat counters in the major grocery chains. But I also admire my butcher’s determination to do whatever it takes to survive by cutting his costs to the bone (no pun intended), by extending his opening hours, rethinking the product he sells so that it’s affordable enough to stop his customers from shopping exclusively in the discount grocery chains and by keeping up the all-important delivery of friendly, efficient service. 

 

A PERTINENT OBSERVATION 

His balance sheet observation is a pertinent one for all of us. 

I don’t share my butcher’s optimism that the worst is over, however. My guess is that fearful consumers everywhere will drive price deflation further and it will devastate all but the most resilient industries and service providers in the coming months.  Those that do hang on will then be hit by the second wave of destruction:  the consequence of all the re-inflating of the global financial sector and all the other bail-outs that have taken place since last autumn. 

 

Once the central banks and governments have brought interest rates to zero (ie. ‘free’ money), have no more government bonds or debt to issue or exchange for the toxic sludge held by credit institutions, and have sent out the extra hundreds of billions of dollar (and equivalent currency) stimulus cheques to ordinary consumers to get us all spending again, the real end-game will probably emerge. 

 

The professional moneymen and dealmakers will know, early on, to snap up the oil and food commodities, land, precious metals, water resources and the strong, giant household durable companies that produce goods we cannot do without. 

 

They’ll know that you can’t pour trillions into the money system (in the space of months!) and not expect the existing paper currencies in people’s pockets and their savings to maintain their value, hence their quick market action.

 

The ordinary punter, as usual, probably won’t know what hit her until it’s too late; the middle classes tend to get wiped out if and when hyperinflation hits.  

 

I thought such a scenario sounded pretty unbelievable too – apocalyptic even – when I first read about it a few years ago, long before the American and European banking system imploded.  

 

An old-fashioned bunch of Austrian economists, led by Ludwig von Mises and later by Nobel Prize winner FA Hayek, first described back in the 1920s what is happening now in 2009.  Back then, the post-World War I Weimar Republic in Germany lost control of its money supply in its effort to repay its unbearably high war reparation debt. Housewives ended up carrying suitcases of banknotes to buy their daily pumpernickel. 

 

Hayek and von Mises argued then that the artificial inflating of the money supply by governments inevitably ends in an economic slowdown and then recession, but that recession is a painful but necessary period of balance sheet correction. 

 

Trying to prevent the correction by the further expansion of the credit supply and by bailing out insolvent businesses by redistributing scarce credit resources to them, said the Austrians, instead of making it available to worthy, solvent enterprises, only temporarily avoids the correction.  It ultimately ends with the destruction of the currency system itself. 

 

Since the credit crisis began, the US and other governments and their central banks have borrowed or created the equivalent of about $10 trillion dollars of extra credit, debt and cash (the latter out of thin air) to try and recapitalize the banking system and inflate away the historic amount of personal and corporate debt that has been accumulated since the 1970s, but especially since 2001. 

 

It would be nice to think that this time the central bankers and politicians – who got us into this fine mess in the first place - will know how to put the genie back in the bottle once all those hundreds of billions of paper notes are pushed out into the marketplace. But I think that’s a long shot.  

 

 

YOU NEED A PLAN

I’ve written a few times in these pages about the importance of knowing the difference between your ‘wants’ and ‘needs’. Chances are that this is the year that you’re going to find out just how important is that distinction. 

 

The deflation we’ve been experiencing – in the falling price of property, stocks and shares, pension funds, food and oil, household goods and even wages is a reflection of the mountains of debt instruments that have been unraveling, and the fear of consumers that there is worse to come. 

 

For as long as the deflationary periodlasts, it won’t be a good time to have outstanding debts.  But if and when inflation takes off, your debt will start to fall in value; the trick is whether you can stay solvent long enough to enjoy its depreciating effect.

 

Lean and Mean

 

Ideally, you want your personal finances to be as lean and mean as your business. Cut your overheads as much as you can by assessing just how much you need to consume to keep yourself and your family healthy, well-fed, clothed and educated or amused: 

 

Review your housing and food costs, the two biggest expenditure most families have; aim to save at least 10% or more from your food bill, if you haven’t already.

 

Try to cut transport, utility and insurance costs.  Regarding the latter, comparison shop for lower house, motor and health insurance. You may not need the annual, family travel insurance this year or the expensive – and mostly useless – payment protection insurance that comes with mobile phone contracts, expensive electrical goods, etc. 

 

Do not sacrifice your term life insurance contracts if you have dependents or PHI, also known as income protection insurance, which pays out in the event that you fall ill or incapacitated and can’t work. A good independent broker should be able to help you source all sorts of cheaper insurance contracts. 

 

Reconsider your holiday plans. The Irish are big spenders on holidays abroad – this could be the year that it pays to rediscover the joys of your own back garden and magical mystery day trips with the children here in Ireland. 

 

Start using cash, rather than credit.  Take up a cheaper hobby or past-time, anything other than ‘shopping’. 

 

 

Economic downturns don’t last forever.  All those spa treatments, designer clothes and shoes, botox and hair extensions, endless gadgets, new cars, weekend city breaks, private education for the kids…even the mad property investments in some far away sunspot will come round again.  They always do.   

 

The problem with a global recession-cum-depression is this kind of conspicuous consumption will simply jump a generation…or two. 

 

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IT’S OFFICIAL:  WE’RE SAVING NOT SPENDING (AND A GOOD THING TOO)

 

The man and woman in the street seem to know an awful lot more about this recession than their governments:  they know that the only way to get yourself out of a financial hole is to stop digging.  

 

Instead, the hole must be filled in – with savings – so that you can eventually, genuinely, afford the things you want to buy.  A prudent savings regime will even allow you to borrow again, for the really big ticket items, like a home, which cannot realistically be purchased with savings that have already been ravaged by the tax-man.

 

In the first quarterly Savings Index survey from Postbank, the banking arm of An Post, found that 75% of respondents are saving some money, however modest the sum. Over the next three months 54% of existing savers said that they intend to maintain their level of savings while 21% of respondents intend to save even more.  Only 17% say they are likely to reduce their savings in the next three months. 

 

Meanwhile two thirds of all savers are still doing so within their original SSIA range of €254, a good thing too given that our debt to disposable income ratio, at c180%, is the highest in Europe and even higher than in debt-laden America and Britain. 

 

Too bad then that our government and all the other governments and central banks that are doing everything possible – like lowering interest rates below the rate of inflation - to discourage us from cleaning up our personal balance sheets by paying down our debts. As this Postbank survey shows, there is no shortage of common sense amongst the public:  three quarters of respondents, back in the second and third weeks of December, admitted that they “are looking to preserve or increase their savings amounts and more than 40% say specifically that they are saving for their emergency fund”. 

 

(The ‘emergency’ or ‘contingency’ savings fund is something this column has always promoted and should amount to at least three to six months worth of your net, after tax, income.)

 

Meanwhile one third of respondents say they are saving up to €100 a month, while a further 30% are saving between €100 and €250.  Just 5% are putting away over €1,000.  Not surprisingly, the biggest group of non-savers are the 18-24 year olds and pensioners, neither group of which generate much or any surplus income; but interestingly, the one group that have been regularly vilified in the recent past as the most profligate – the 25 to 34 years olds – are now identified as the biggest single group of savers (83%).

 

Aside from that ‘rainy day’ purpose (with 42% response), Postbank say that people are saving for holidays (15%), retirement (9%), a home loan or mortgage (8%), education (7%) and just 2% for home improvements.  Weddings are the source of just 1% of savings and 14% are saving for ‘other’, unidentified purposes. 

 

 

The low level of mortgage savings shouldn’t come as much of a surprise; mortgages are purchased when people are confident that their jobs are secure and prices are not just affordable but stable, or rising.  None of those factors are at play at the moment.  Nevertheless, Postbank officials last week said they’re proceeding with their plans to introduce a mortgage product later this year.

 

 

And what are Irish savers expected to cut back on in 2009, if at all, according to this survey?  First, lunches (41%) followed by holidays (35%) and fashion purchases (34%).  This is followed by coffee and alcohol (31%), beauty products and treatments (28%) and visits to the cinema 21%, which is pretty good news for the sellers of smaller treats, but doesn’t sound too hopeful for the beleaguered restaurant trade, the holiday industry or high street shops. Again, it will be very interesting to see how these figures adjust next April, when the impact of government cutbacks and higher unemployment figures take effect.

 

Finally, this first ever national savings survey also asked people about their level of confidence in the banking system.  43% of respondents noted that the security of their funds was even more important than the interest rate on offer (31%) while 28% said that access to their money was their priority.  

 

I expect that that 43% figure will be even higher when the next survey comes out. 

 

The banking crisis here is far from over and Postbank is now in the enviable position of not only being the official banking arm of AnPost, one of few financial institutions to maintain its financial integrity, but one of very few banks (RaboDirect being another) that is not burdened with catastrophic levels of property-related bad debts. 

 

Next week:  What savings accounts deliver the best interest rates AND meaningful security?

 

 

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I wonder how many parents have worked out how much more their child’s private secondary school would have to charge them if the government was to withdraw the €99 million annual subsidy it pays every year just for the teachers wages in the state’s 56 private secondary schools?

 

According to the most recent audit of private fee-paying schools by the Department of Education, the average fees are in the region of €5,000, and the Department pays for the salaries of just under 1,500 teachers, or approximately €66,000 each.  Some of the larger schools, like Blackrock College received nearly €4 million in subsidies; others like the smaller Loreto College on Stephen’s Green, €1 million.  

 

You don’t need Leaving Cert maths to do the arithmetic however. If someday, the government decided that subsiding private education was a luxury that taxpayers could no longer afford and abolished it altogether, the school with 800 students who have enjoyed a €3 million euro subsidy will either have to increase their fees by €3,750 just to maintain the existing teacher student ratio, or reduce the number of students it takes in.  The final option to increase the number of students per class is a non-starter since most parents send their children to private tuition for the smaller class sizes. 

 

Private secondary education is coming under the spotlight for a very good reason:  either the government continues to subsidise the fee-paying schools or the university sector.  It can’t afford to do both anymore, no matter how popular the subsidy is to middle class voters many of whom,, despite having very good schools in their comfortable, leafy neighbourhoods have turned private school education for their children into a ‘must-have’ lifestyle choice. 

 

The private school sector, no more than any other business, is unlikely to survive this recession unscathed as parent’s jobs and businesses struggle with the downturn. There are anecdotal reports already that ‘this boy’ or ‘that girl’ may not be coming back in the next year and that principals in state schools are getting more calls from parents wondering even now if there will be a place available for their child next September. 

 

This should set off a few warning bells and have parents with more limited budgets to pull  outa calculator now and work out the huge financial commitment they may end up facing if secondary fees rise sharply and third level fees are re-introduced.  Ten years of private education could easily amount to €60,000 or €70,000 or even more, per child.

 

Unless you make provision early for a bill like this, the local convent or CBS may not be such a bad alternative after all. 

 

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It isn’t just the banks that are feeling the cold wind of the credit squeeze and the collapse of asset values; international insurers have also seen their own investment portfolios and reserves come under pressure as their customers lose their jobs or find their incomes squeezed.  The days of cheap insurance may be coming to an end. 

 

Insurance companies make money by taking in more premiums than they pay out for catastrophic events and for the more mundane ones like motor and workplace accidents, fire and theft, lost luggage and of course, an untimely death. But they also expect to earn profits from investing premium income, some of which of course is diverted to meet their substantial reserve fund requirement. 

 

While it would certainly appear that insurance companies are in far better fiscal shape than the banks, every report I read about the insurance sector says it too is under pressure and that we should be prepared to higher premiums. 

 

Forewarned is forearmed.  Use a good broker when shopping around for your insurance, but make sure to call a few of the direct insurers yourself as well. Know what you are buying – you may be taking on more cover than you need. 

 

In fact, the Financial Regulator has just produced it’s latest motor insurance cost comparison survey at www.itsyourmoney.ie  and while itdoesn’t look to me as if premiums have gone up significantly compared to the 2007 survey, there are still significant savings between the insurers:  the example of a 27 year old office female office administrator seeking comprehensive cover for her 2003 Ford Focus show how she would have paid a whopping €663  more for her insurance by buying it directly from one of the insurers mentioned, rather than going through a broker. 

 

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High maintenance yummy-mummies might want to keep an eye on the example the new Mummy-in-Chief, Michele Obama and the good spending example she’s setting as the recession deepens, at least so far as her own dress budget is concerned. 

 

While he certainly earns a good salary and perks as President – the Pennsylvania Avenue and Camp David digs come with the job – Barack Obama doesn’t earn as large a salary as our own Taoiseach, Mr Cowan and doesn’t have great family wealth to fall back upon, unlike his predecessor.  Book royalties have helped to boost the new First Family’s income, but unlike the Bush’s, the Obama’s are only just comfortably wealthy, rather like Tony and Cherie Blair were in their early years in 10 Downing Street. 

 

Michele Obama gave up her job over two years ago, but she’s always been surefooted about her spending, say her friends. While always fashionable, she isn’t a clothes horse they say, and she favours up and coming young American designers rather than the pricey old haute couturiers favoured by other First Ladies  and even relies on stylish catalogue companies like JCrew for her casualwear. 

 

From what her friends say, there will be no thousand dollar, let along five thousand dollar handbags surfacing to embarrass her or her husband as the economic crisis worsens. 

 

No one expects Mrs Obama to embrace austerity. The clothes she wears will give American fashion a big boost tat a tough time, but I expect what she buys and how much it all costs will be judged just as critically as the hundreds of billions her husband intends to spend. 

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AMcC writes from Dublin: I am considering cashing in a small occupational pension that I earned while I worked in America and I have been told that I am obliged to pay US taxes of 20% on the lump sum.  As I am now tax resident in Ireland, would I also be liable for additional Irish taxes if I then repatriate this cash to Ireland. 

 

As an Irish tax resident you are obliged to pay tax on all your worldwide income – in this case, capital gains tax of 22%.  The double taxation agreement with the United States means that you do not pay tax twice on this encashment and you can claim a tax credit for the 20% US payment. 

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EC writes from Co Kildare: I hope that you might be able to guide me because I don't know whether to encash my policy or hold on and hope for a good return on maturity date.  I took out an Irish Life, indexed linked Treasury Plan starting with the equivalent of €110 (£86.66) a month back in January 1995 and it matures in 2015. I now pay €48.25 per week.  Last September 25th my fund was valued at €22,873.79. The lady I spoke with suggested that unless I needed the cash, she would encourage me to hang on in there.

You still have six years before this policy officially matures but chances are that its value has continued to fall since last September.  Your contributions have probably exceeded the fund value at this stage so you need to decide for yourself whether the growth prospects going forward will be positive enough to make up for your current losses and produce a decent profit (after the 26% exit tax on profits is also taken into consideration.) This was almost certainly an investment plan that carried substantial fees and charges and one thing you certainly should consider doing at this stage is stopping the index linking of your contributions. Most of the indexing every year is probably being paid to the salesman, and not into the fund.  If you do cut your losses, you could use the €2,500 you are paying in every year to pay off your mortgage or other debt, as a tax deductible contribution to a low risk, low cost pension fund, or to save it or invest it in assets that will hopefully survive the recession intact and/or come out the other side having paid you steady dividends or interest – physical gold and silver, consumer durable shares, oil stocks, good farmland, etc.  Before you make any decisions make sure you have all the facts, and that includes urgently finding out exactly what the fund is worth today and your contributions to date. 

 

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EB writes from Dublin: Since the US is in so much debt and the federal reserve is printing vast amounts of money do you think there will be a collapse in the dollar? I have some cash available for investing for the long-term and I would like to take advantage of some low stock prices. I would like to buy shares on the NYSE but I believe a collapse in the dollar is inevitable. Would I be right in saying that if I use euros to buy shares quoted in dollars and the dollar subsequently collapses, will my investment be devalued? I understand that if I buy shares in, for example, a Brazilian company quoted on the NYSE, and the dollar loses half of its value against the Brazilian currency, then the price of the stock will double on the NYSE to reflect the true price in Brazil. If I buy this stock with euros, will my investment still be devalued by a collapse in the dollar? 

 

Predicting currency movement is a mugs game and not even the professionalsalways get it right.  That said, the contrarian view of the dollar – which has recovered some of its strength since the credit crisis began – is that the creation of trillions of dollars of new loans, credit and cash (printed out of thin air by the Federal Reserve) will inevitably result in the devaluation of every dollar already in circulation, and ultimately in the long-term viability of the dollar. (You can read more about the Austrian School theory of economics here:  www.mises.org).  If you buy shares on the US stock exchange, first converting euro into dollars, and the dollar collapses, it means your share will be worth that much less.  If you buy Brazilian stocks and the dollar collapses and the Brazilian currency strengthens against the dollar, but the dollar remains weak against the euro, your loss may be less when you sell the Brazilian shares.  The thought of these permutations is giving me a headache however, so I’ll just repeat what I’ve written many times in this column: The only reason to buy any shares, anywhere these days, is because they represent sound, long term value relative to their assets, management, cashflow and dividend payments. You have to accept that the moment you invest outside the eurozone, you take a currency exchange risk and incur extra costs. 

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NO RETIREMENT FUND?  HOW ABOUT YOUR OWN VERSION OF ‘FRIENDS’ 

 

Back in 2001 I made a modest lump sum pension contribution into an equity fund with a well-known pension provider.  My timing was bad that year – the NasDaq crash and 9/11 reduced the value of my contribution pretty quickly. It recovered but then last year happened.  

 

That’s pretty much the story of most of my pension funds at the moment, though one or two have fallen far less, thank goodness, and one has actually remained entirely in the black.  I still have more than a decade before retirement, but my ‘early’ retirement plans have pretty much been …well, retired, after the devastating losses of the last year and the poor prospect for a recovery in the immediate future.  

 

The substantial tax relief that I’ve enjoyed on my pension contributions is some consolation for poor performance  but how long this huge, two billion euro tax break lasts for private pension contributions is another matter:  the government finances are under extreme pressure and long term retirement problems will either be sorted out once and for all once the Pension White Paper is published, or the pensions issue will be shelved as more pressing issues like our eye-watering budget deficit and borrowing requirements take up everyone’s attention in the Departments of Finance and Social and Family Affairs. 

 

Younger people still have time on their side. Last week, Bank of Ireland suggested that a 30 year old earning €30,000 who has been contributing to a pension for the last decade should add another €112 a month to make up for current losses – at a real cost, after tax relief of just €66.  (Presumably, this money is going into a nil-risk fund). 

 

But what about the person in their 50s or worse, on the verge of retirement who were counting on their 20 or 30 or 40 years worth of occupational and personal pension contributions or AVCs to provide them with a decent retirement?  Higher contributions may not be possible if they are already making maximum payments.

 

Last week I mentioned the author (“Liar’s Poker” and “Gold: The Once and Future Money”) Nathan Lewis’ unconventional, but practical suggestions to employers and workers who desperately need to find ways to stay afloat as their economic conditions deteriorate.  He proposes the company as ‘family’, meaning that it does more than just provide an increasingly fragile paycheque at the end of the month. 

 

But he also has some rather ‘off-the-wall’ views about baby boomer pensioners, who spent more than they saved these past decades, who are now worrying about their heavily depleted retirement funds:  he suggests moving back in with their old college room-mates. 

 

In a recent column on the excellent (and free) DailyReckoning.com newsletter, Lewis produces some interesting figures to support the idea that four, or six can live a lot more cheaply than two. See http://www.dailyreckoning.com/Issues/2009/DR010709.html#essay)

 

He describes his own parents, just retired, who have suffered big stock market and pension losses in the past year and whose mortgage-free home has also fallen dramatically in value. Even running a paid-off home doesn’t come free – there are basic living costs that need to be paid – the car, utilities, insurance, food and taxes.  Here in Ireland, a €20,000 combined contributory/adult dependent state pension will barely meet all those overheads and leave much money left over. 

 

“Like many older people, [my parents] would like to stay in the house they have owned for about 20 years now, in the community they are accustomed to, and near the friends they have,” writes Lewis. “It’s not so easy to start over when you’re over 65.

“So, here’s the plan:

“You get together with your friends. You say: “We’re all retired now. I’ve got a big empty house. You do too I suppose. Maybe we can think of living together. That would help reduce our living expenses. Plus, it might be fun, and it would be a good way to keep an eye on each other. That can be important when you’re getting older.

 

“Everyone is repulsed at first, because we Americans are all taught that we have to live as far away from each other as possible. But, they remember that, when they were in college, they used to share houses, and it was kind of fun. Also, everyone is older now and a lot better behaved than when they were in college. And, it is true that it might be good to have someone keeping an eye on you.”

 

Lewis shows how by combining resources – sharing one existing (larger) house on which a proportionate rent is paid to that owner by the incoming couple or couples, who then rent out their smaller house(s) to supplement their own incomes - can make the combined incomes go much further.  Food, utilities and other costs are also shared; the savings can be converted into more discretionary income – to run a car (if they can’t otherwise), for travel, etc. or to pay for domestic help and eventually, even nursing care as the housemates get older. 

 

Could it work if the parties really were compatible and flexible? Personally, I could see two or three older fellas living happily together more than than the three fellas and their respective wives.  But sometimes desperate times call for desperate measures. 

 

You just need to be willing to let that light at the end of that gloomy tunnel shine. 

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At least one side of the regulator’s office seems to be earning their keep:  the financial Ombudsman has seen a 36% increase in the number of complaints, or nearly 6,000 over the past six months, arrive across his desk, compared to the same period in 2007.

 

The Ombudsman’s office deals with everything from people unhappy with the way they’ve been treated by their insurance company, to those who’ve been fraud victims, but by far the most serious case over the period - at least in terms of financial value – is the one in which a credit union was refunded €500,000 of the €1 million that was all lost after they hastily invested it in a ‘wrapped around’ insurance bond. 

 

But this case ended up in a rare oral hearing with both sides found to be equally at fault by the Ombudsman – the stockbroking firm for failing “to advise the credit union of the risk of the possibility of total loss of capital”; for its “inadequate’ presentation; its lack of thoroughness of research into the bond and its failure to point out to the credit union that the bond was outside the ordinary type of investments that were typically made by the credit union”.  He conceded that the broker believed it “acted in good faith” by regarding the bond as low risk but “the true nature of that risk should have been cogently pointed out to the credit union” -  that is, that there was absolutely no capital guarantee provided.  This was especially important given that two of the three investment committee members “were not in the remotest sense experienced in investment matters.”

 

Nevertheless, the Ombudsman also found that the investment committee “could not absolve itself from the disaster which occurred” as a result of the meeting and presentation that lasted “between 15 and 30 minutes at the most”. After the stockbroker left them, they agreed, “there and then” to invest in the bond and admitted under oath that they “in effect, ‘blindly signed’ the application form and did not even read the brochure, or indeed the conditions under which they were investing €1million of members’ monies. One of the conditions included a warning that the investment could be worthless.”

 

It is unfortunate, but not always inexplicable when ordinary people, with no training or understanding of complex financial investments, but who are seduced by the idea of higher than average returns, admit to not fully reading or understanding the lengthy contracts and small print that still accompanies most financial contracts. 

 

It shouldn’t happen to an investment committee entrusted with millions of other people’s savings. 

 

Has the Ombudsman, Joe Meade, delivered a fair judgment? The credit union doesn’t think so and is exercising their rights by appealing his finding to the High Court. Meanwhile he referred this particular case to the Financial Regulator for their further attention.  

 

Oh dear.  Perhaps it would have been even more helpful if he’d suggested that all credit union members also satisfy themselves that the people they’ve entrusted with their money actually know what they are doing before they hand over surplus millions to other investment intermediaries in the search for safe and profitable returns. 

 

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I’ll certainly be watching the swearing in of President-elect Obama on Tuesday – my tenth such viewing. I sincerely hope he can deliver the leadership that America and the rest of the world needs, but I have my doubts about his ability to fulfil his first promise – to do his best to create millions of jobs and reverse the financial devastation of the past year. 

 

I don’t expect any shoes to be thrown at the handsome, young president at his inauguration ceremony, but I won’t be too surprised if it happens before he leaves office. 

 

With no government surplus to tap into, this latest trillion dollar bill for the huge stimulus package of public works, alternative energy project and mortgage bail-outs will have to be paid for, not with more taxes, which have been ruled out, but with further borrowings and ‘quantitative easing’  which amounts to the printing of money. 

 

Perhaps this is where we, the beleaguered Irish, can make a small contribution, by example, to President Obama’s new, ‘New Deal’. 

 

Here, thankfully, we don’t have the luxury of a printing press anymore or we too would undoubtedly be churning out euros to cover our huge deficit.  Instead of stimulus programmes, however, we’re finally accepting that we need a cutback programme - of civil and public service wages and jobs, of executive positions within the government itself, and in the ‘free’ healthcare, education and other public services we can no longer afford.  

 

Maybe we can show the new US administration how a country can prioritise it’s money if it must: for example, if it came down to a choice, say, between spending a billion euro a year on our army – and we are a tiny country with no known enemies and a friendly, nuclear neighbour – or continuing to pay out a billion euro worth of child benefit payments to our own children and those we support in the developing world, I expect we’ll make the right choice. 

 

President-elect Obama hasn’t talked much about cutbacks, except perhaps in the context of their own military spending: these last eight years of war, without a war economy, and the expansion of the US social security, Medicare and Medicaid programmes for the poor and the elderly during the Bush years, is reckoned to have helped expand the real US deficit to well over $60 trillion. 

 

There is no possible way all that those promised entitlements and existing debt and credit commitments can be met by this or even future generations of US taxpayers.  Obama’s choices were always limited to acknowledging the existing massive financial hole and drawing up plans to tackle it… or by doing as he appears to be starting his presidency – by deepening the hole in the hope somehow that the extra shovels full of debt and credit can stop the walls of the economy from collapsing, at least on his watch. 

 

Enjoy the inauguration ceremony.  Reality sets in on Wednesday. 

 

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Here’s a couple of intriguing Irish ‘stimulus’ ideas that a reader sent in, who might very well be a taxi driver in the market for a new house. 

 

The first one gives the taxi industry a boost while also reducing the huge cost to the state in policing speeders and the carnage they leave behind: “Allow any taxi in the country to be fitted with speed cameras and share 50% of the revenue with them on speeding fines that they generate.  The real loss of life is late at night in rural areas; pretty soon all late night partygoers would know that they’d be caught.”   

 

 

Suggestion two is to “reduce the stamp duty payable on any dwelling by the percentage improvement in the energy audit certificate level, post-sale.  If I purchase a house with a D1 energy classification and within a year it’s improved to a C1 level, then a 26% rebate on stamp duty would reply.  This should give a boost to the building sector and clear unsold houses.”

 

 

So would eliminating stamp duty altogether, but probably not until the housing bottom is reached and as the auctioneers have finally acknowledged, that won’t be this year. 

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MS from Dublin: I will retire in two years (age 65) after 20 years in my present employment. At that time I will have €250,000 in a directors pension plan. I believe I can take 1.5 times salary in a lump sum, tax free, and agree a pension with remainder. How is salary calculated at this time? I have my direct pay, bonus and a company car, all taxable. Are all three elements included in salary? I also have an old personal pension plan of €30,000. What are my choices of benefits on this? If I do not reach retirement date, can my family claim the entire amounts in cash?

 

Your final salary will be deemed to be the average of the best three consecutive years over the last 10 years of employment, and this includes basic pay, bonuses, overtime “and any other payments that are subject to schedule E tax liability including the value of any benefits in kind,” says financial advisor, Gerard Geraghty of Geraghty & Co in Westport. You have a number of option for the remainder of your pension funds: you could buy a pension annuity, but “unfortunately rates to include a similar aged spouse are poor and are likely to be around 5%. An index-linked joint annuity would be significantly lower again. If your reader is a 5% Director he wouldn’t have to buy an annuity but could take 25% of the fund as tax fee cash and use the balance to buy an AMRF/ARF for the future use of all his family.” Similar options exist for your €30,000 pension fund but Geraghty warns that “if he has taken 1.5 times final salary from the main scheme he is not entitled to any more cash.” As for the question about you dying before retirement, your dependents would be entitled to up to four times your final salary as a tax-free cash payment with the balance of the pension fund used to buy them a pension annuity. Pension scheme members with 15 years or less of pensionable service can avoid this by transferring their fund now to a PRSA, the proceeds of which are paid out tax-free to their family upon the death of the account holder. 

 

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MB writes from Co Laois:  On November 16 last you wrote about American shares like Palmolive, Coca Cola etc and also about junior gold and silver mining companies that might be worth investing in. I have €5,000 euro at my disposal and would love to dabble in shares like these. I do not have any experience of buying shares and wonder if you could give me some advice about how I might go about doing so. I would be very grateful if you could help me out with this matter.

 

Consumer durable shares are those whose companies create goods and services that people feel compelled to buy, no matter what their financial position:  goods like soap and other personal hygiene items, food items, petrol and heating oil for their homes, fast food (like McDonald’s, whose share price is rising).  The most successful companies in these sectors have huge turnover, little or no debt, world class management and lots of money in the bank.  Their share prices have fallen (though not as much as most) but they continue to pay strong dividends and are seen as steady, longer term (ten years or more) buys.  The gold and silver companies are a much riskier punt but commentators believe the mining shares are underpriced compared to the physical metal prices; the shortage of gold and increasing demand is what makes these shares attractive, at least over the short term. Do your homework.  A good place to start is by reading the financial pages, (many of which are free on-line), to keep up to date; The Economist for a global view, and free web-based on-line newsletters like www.fool.co.uk  and www.dailyreckoning.com  and www.mises.orgwhich provide mainly contrarian views to the Keynesian commentators who support governments borrowing and spending their way out of recession.  (The Austrians believe you cut spending and taxes and let the recession correct itself.)   Learn about ETFs – exchange traded funds – which are low cost alternative to expensive mutual funds of shares; ETFs also spread your risk amongst many shares or commodities in a sector.  The Irish Stock Exchange (www.ise.ie) now sells ETFs and you can purchase these and other shares via a stock broker or by setting up your own lower cost share dealing account with the likes of Sharewatch.com (Ireland) or even via the share service that National Irish Bank offers its on-line current account customers. 

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DESPERATE TIMES CALL FOR DESPERATE MEASURES?

 

If you haven’t read Michael Lewis’ 1989 bestseller ‘Liar’s Poker’ about his brief life as a broker at Soloman Bros investment bank on Wall Street, you really should.  

Aside from being a funny, cracking good read, it also set the stage perfectly for the culture of greed that predominated the world of high finance until last autumn when decades of excess finally caught up with the so-called money ‘Masters of the Universe’ who were also perfectly depicted in iconic novels like Tom Wolfe’s ‘Bonfire of the Vanities’.

‘Liar’s Poker’ also launched Lewis’ journalism career and his current analysis of the global solvency and credit crisis is both top rate and eminently readable. (See http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom).

Last week in two fascinating articles, Lewis made a couple of novel suggestions for companies that are facing difficult decisions about how to keep their workforce intact while also trying to keep their businesses afloat in the face of tight or non-existent credit and falling consumer spending, and about the dilemma facing baby boomers whose property values, pension and investment funds have collapsed, shattering their retirement plans. 

But first,  “The combination of skyrocketing food and energy costs, rising medical costs, falling real estate values and stagnant wages is putting increasing numbers of workers in financial distress,” writes Lewis. “A distressed workforce can hardly be a productive workforce, and companies must do whatever it takes to make it physically possible for their employees to function. What can companies do to remedy this situation?” he asks. 

Well, how about treating the company like a family unit in order to cut down everyone’s day to day essential spending and overheads? 

Some firms are already implementing reduced pay, shorter working weeks or unpaid holidays in an effort to cut down on payroll and production costs.  But how many have considered going so far as to provide goods and services to their workforces in lieu of pay or as part payment for more expensive clawed back benefits?

Lewis suggests that companies with their backs to the wall consider offering to use their greater spending clout to help lower paid workers especially, who are struggling to meet their food, clothing, fuel, and even housing costs by ramping up their canteen facilities to include breakfast and early evening meals – with takeaway dinners also available to bring home to families –  by providing wholesale grocery or petrol vouchers for free or at discount prices, setting up group insurance schemes if they aren’t already in place and even offering to house younger, single workers by renting properties in empty estates. (It’s already been done in the meat trade for immigrant workers.) 

Here in Ireland (and probably in the US) there are benefit-in-kind tax issues to address, but in desperate times – and few would doubt after the Dell announcement in Limerick that the government might want to ease up on its Revenue rules – such roadblocks shouldn’t be insurmountable. 

And if this smacks of the visions of a grim satanic mill owner forcing their workers to buy goods at the company store, consider that Google, whose European HQ is based in Dublin and operates one of the most impressive employee benefits packages that includes, writes Lewis, (quoting Google’s US boss Eric Schmidt of the US operation) “first-class dining facilities, gyms, laundry rooms, massage rooms, haircuts, car washes, dry cleaning, commuting buses - just about anything a hardworking employee engineer might want."

These benefits are in addition to a generous package of wages and conventional benefits, but the message shouldn’t be lost on smaller, struggling companies:  in a downturn some creative thinking needs to be considered to reduce costs, but also keep your best assets – your people – intact.   Some workers may not be able to take a pay cut or a reduced working week if they can’t also put food on the table or find the money to tax and insure and put petrol in their car.  But if personal expenses can be offset by the bigger purchasing power of a company that can command wholesale or discount rates and there’s a willingness to consider the unconventional, then why not?

As the thousands of workers in Limerick affected by the Dell factory closure will know to their cost over the next year, and all the people affected by the collapse of Waterford glass, this is not a brief economic cycle downturn as we have experienced a few times since the Irish economy was finally dragged into the late 20th century and the birth of the Celtic Tiger around 1993-94.  

This one is going to kick the living daylights out of big and small companies – and countries, as it has already to poor little Iceland, to the nearly bankrupt Ukraine and Hungary – before it’s over.  And it’s going to take imagination, fortitude and cooperation as well as hard work and luck to get us out the other side, bruised and bloody but still standing. 

Next week:  Could you live with your old roommates again?  At 65?

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With a US private equity fund looking as if it will acquire at least some of the assets of the Waterford Wedgwood group, which is in receivership, the question on workers’ minds in Waterford (and no doubt those at the Derbyshire china factory) is not just whether they will still have their jobs, but also their pensions. 

Last October the precarious state of the vast majority of defined benefit pension funds was raised at the Irish Association of Pension Fund’s annual conference by Maurice Whyms, a director of the Dublin pension and actuarial consultants Attain. He said then (and I reported his comments here) that a combination of the credit crunch, collapsing stock market asset values, pensioner longevity and tough accounting and funding standards had created a perfect storm that could pack a devastating financial blow to members of defined benefit pension schemes like Waterford’s which has a funding deficit of €110 million and several thousand existing and future pensioners. 

In the UK, the increasingly burdened Pension Protection Fund (PPF) offers 100% pension income guarantees to existing pensioners and a limited guarantee of up to 90% or £27,770 whichever is the greater to remaining pensioners as they reach retirement, but here, there is no such scheme. Under our statutory rules, when a defined benefit pension scheme is involuntarily wound up, pensioners and AVC fund-holders gets first crack at what money is available; only then will existing worker members of the scheme and deferred members, who left the company early but still expected to collect a partial pension, receive any payment from what is left in the fund. 

The great injustice of this system, says Mr Whyms of this payment priority, is that someone who is 64 and three quarters, and had worked alongside others for decades but who retired a few months earlier, will have no more entitlement to his life’s savings – the pension fund - than a young worker who may have only been in the scheme for a few years. 

 

The Waterford insolvency and the involuntary winding up of its defined benefit scheme probably won’t be the last one this year. Last October it was reckoned that 75% of DB schemes were in deficit; that number is undoubtedly higher as stock market losses continued through the final quarter and the trading environment worsened for so many firms. 

 

Even in the UK, where the PPF has been in operation only since 2007, it has only £2.7 billion in assets and a deficit itself, and is struggling with a £517 million deficit. 

 

So what happens to the thousands of Irish Waterford group pensioners and employees if the new buyer buys the company assets, but not its pension liabilities?  With no compensation scheme of any kind in place here, should the Irish government step in and even part-guarantee those pensions? 

 

The members of the Waterford pension scheme and their representatives will no doubt demand such an intervention, given how Irish bank depositors and creditors have been bailed out. 

 

But then so will every other worker and retiree whose company and defined benefit pension fund ends up in liquidation or receivership.  

 

 

the total value of the fund, which is funded by employers and not the taxpayer it’s total value is just £2.7 billion and it is quickly being drained by large, high profile insolvencies like 

 

Three months later, as predicted, the 8,000 existing and future pensioners of Waterford Wedgwood – 800 of whom still work in the Kilbarry factory - are about to find out exactly how vulnerable they are. 

 

The Waterford DB scheme is reported to have a funding deficit of c€111 million. Under current legislation, existing pensioners If the Irish government isn’t willing to act quickly to address the apparent unfairness in the priority payment rules – and it would require a change of legislation to do so – a similar case currently in the UK courts could become very significant, says Maurice Whyms. 

 

In that case, a man called Robins, who believed he was unfairly treated when his company DB scheme was wound up went to the European Court.  He claimed that his government hadn’t done enough to enact an existing EU directive that directs member states to protect all worker’s pension benefits in the event of a scheme wind-up. He won that case but it is back in the UK courts.

 

Let’s hope it doesn’t take similar action to bring more fairness to the Irish pension system. 

 

I’m looking forward to reading the new Fine Gael universal health insurance strategy when it is published later this month, and I’m sure the three existing health insurers are keen to see it also, if only to see what role FG see for the wholly owned government insurer, the VHI.

 

Universal health insurance, in which insurers and hospitals compete for clients under community rated regulation that eliminates the gross inequality of our existing two tier system, will undoubtedly attract many more insurers into the Irish health insurance market which only has two genuine private sector companies competing against the dominant government-owned VHI. 

 

If universal health insurance were to work as well here as it does in Holland, which is the model that Fine Gael are advocating, the VHI cannot remain in the ownership of the Department of Health, which should be reducing its role in the day to day operation of the public health service anyway.  

 

Under a universal health insurance system the government’s role should be confined to setting the standards of care and service that the hospitals and all health providers must meet and of course, ensure that those who cannot afford even the most basic insurance package are still fully covered.  It will certainly have to result in changes to the volume and method of, effectively, double taxation – that currently applies to those 2.2 million people who both contribute to the public and private systems. 

 

If we eventually get a universal insurance system conquerable to that of Holland, the queue jumping that exists for the insured will hopefully end, but so will the terrible waiting lists.  

 

The Minister for Health says this will happen anyway under the new hospital consultant’s reforms, but the difference is that the army of HSE and Department bureaucrats will still be in control, rather than consumers, their insurers and the people who actually work in and run the hospitals.

 

In the same way that we would never want the government running the way food is distributed and sold in this country, we should commend Fine Gael for finally realising that under their watch, at least, they wouldn’t be entirely running the delivery of health services either. 

 

My Canadian family and friends were stunned to hear how the Irish economy had suddenly collapsed.  “I couldn’t believe it when I read how people are immigrating again,” my brother remarked over Christmas dinner with the extended family in his cottage in the snowy Laurentian hills, north of Montreal. “Every year that I visited you in Dublin, things seemed to be getting better and better.”

 

He was right about those years during the 1990s and early 2000s, but that was before we abandoned genuine commerce and trade to blow up a property bubble. 

 

“Oh, we started doing that too in the last couple of years,” the brother replied, “but a lot of people remembered the crash of ’91, and the Canadian banks are heavily regulated so subprime and 100% mortgages never really took off to any huge degree.”

 

Lucky Canada.  But some property bubbles have burst – in the Mont Tremblant ski area where a flurry of for sale signs litter the ski hills and, says a nephew who now teaches at Memorial University in St John’s Newfoundland, at the exclusive Humber Valley holiday development which was aggressively flogged to UK and Irish investors about five years ago.

 

Back in 2003 the Humber Valley development on the remote west coast of Newfoundland was literally, a million dollar, all year sporting paradise. Last November, it lost its single direct air link to the UK.  The credit crisis didn’t help and property values plummeted and an appeal by the management company, which arranged sales and rentals, for help from the Newfoundland ministry for tourism was turned down flat. 

 

Newfoundland is a beautiful place, but it’s freezing cold in the winter, bleak, damp and foggy for much of the rest of the year and is regularly cut off from the Canadian mainland. Canadians shook their heads in awe at the million dollar price tags on the Humber Valley properties…and mainly left it to Americans, Brits and any Irish foolhardy enough to do so, to pay those ridiculously inflated prices. The Algarve, it is not. 

 

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