THIS TRANSCRIPT IS ISSUED ON THE UNDERSTANDING THAT IT IS TAKEN FROM A LIVE PROGRAMME AS IT WAS BROADCAST. THE NATURE OF LIVE BROADCASTING MEANS THAT NEITHER THE BBC NOR THE PARTICIPANTS IN THE PROGRAMME CAN GUARANTEE THE ACCURACY OF THE INFORMATION HERE. MONEY BOX Presenter: PAUL LEWIS TRANSMISSION 18 JUNE 2005 1200-1230 BST BBC RADIO 4 LEWIS: Hello. In today’s programme, is the Pension Protection Fund putting pensions at risk by taking shares in companies it bails out? Older people can miss out on extra money if they don’t write to the Pension Service when their savings go down. We name the bank which is going to charge £2.50 a month to warn you that you’re heading for the red. Louise Greenwood’s with me today. GREENWOOD: Reporting on a new scheme teaching money management in primary schools. CHILD: Keep your money in a safe place and when you go to the shop to not spend all of your money, to spend a half. LEWIS: Good advice there. And Premium Bonds will make two millionaires every month from August. We start though with a controversial move by the Government’s new Pensions Regulator. It has agreed that the Pension Protection Fund should take on the pension liabilities of an insurance broker called Heath Lambert, even though the company is not insolvent. The Protection Fund, which began work in April, is supposed to step in when a company goes bust and will pay at least 90% of the pensions promised, but the Regulator has agreed that the fund should take over Heath Lambert’s £210 million pension deficit to keep the company in business, and the company’s told Money Box that as a result of the deal it has secured further funding and is trading profitably. In exchange, the Pension Protection Fund will take a share in Heath Lambert. Pensions Secretary David Blunkett has called the deal “very clever”, but others have warned it could lead to solvent companies dumping pension liabilities on the fund. Well live now to David Norgrove. He’s chairman of the Pensions Regulator who approved this deal. David Norgrove, why did you do this deal? NORGROVE: Well the first point was that the company was heading inevitably for insolvency and we absolutely had to be sure of that. The banks and the trustees took independent advice from major accountancy firms which showed that. And then we were also clear that other creditors in addition to the pensions scheme were going to take equal pain, so all the other creditors saw severe losses out of this. Having assured ourselves of that, we then had to decide was it better for the company to go insolvent or for it to continue trading, and on two grounds really we decided that it was better to support an arrangement for it to be allowed to continue trading: first of all that the pension scheme could then get the benefit from some upside instead of taking all of the downside, all of the liabilities going into the PPF; and, secondly, the preservation of employment, which is a factor we’re required to take into account. LEWIS: You mention the upside. That’s the fact that the Pension Protection Fund will now be a big shareholder in this company. How much of it will it own? NORGROVE: Well I’m afraid we’re not at liberty to say what the shape of the deal is. That’s part of the Pensions Act, which requires this to remain confidential. LEWIS: Well I spoke to Heath Lambert last night and they said it’s 10% that could rise to 30%. That’s a big chunk. NORGROVE: Well that’s up to them to say. LEWIS: Well listening to that is Christine Farnish. She’s chief executive of the National Association of Pension Funds. Christine Farnish, your association has been very critical of this deal. Why? FARNISH: Well I think it’s taken the market somewhat by surprise. The bit of the act that this deal is depending on was introduced very, very late in the parliamentary process last year. I don’t think it had full scrutiny and debate in the way it normally would have done and I think the impacts on the market of some of these provisions are only just starting to become manifest. LEWIS: But it was made clear in the House of Lords when it was passed – as you say very late – that this kind of deal could be done. FARNISH: Yes and I think the worry is that this case could send a very powerful signal to the market that struggling employers, struggling companies who’ve got big pension fund deficits can go and talk to the regulator and be able to dump their liabilities and survive. LEWIS: But it saves jobs. I mean would you rather Heath Lambert had gone into liquidation, losing 1800 jobs, because the liabilities on the fund would have been just the same, wouldn’t they? FARNISH: That may be the case. I don’t think we’ve got enough transparency about this particular deal to be able to make that judgement. But I think the worry is that this will put up the cost and the risk involved with the Pension Protection Fund. This is no fault of the Regulator. I think this is a fault of the design of the system and it’s just going to put more employers off continuing with their DB schemes. LEWIS: And could put up the price of those schemes for employees who are paying into them. FARNISH: That’s right. LEWIS: Now David Norgrove, I mean how do you react to that – that this will just encourage others? Once you’ve agreed to one, it’s hard to say no to others. NORGROVE: Well no, I don’t think that’s the case. I don’t expect this to be a very common occurrence and we certainly will need to look at each case very carefully, individually, and we won’t expect this to be an easy option for employers. Nor indeed is it an easy option anyway because they have to reach agreement with all the creditors and their shareholders of course lose all their money as a result of one of these transactions. LEWIS: Yes and of course although the Secretary of State said this was very clever and prudential and pragmatic, he did also warn we desperately need to avoid large-scale interventions of this kind otherwise the fund will not be able to cope. So the Secretary of State sees the dangers too. NORGROVE: Oh I mean our primary objective is to protect members’ benefits and alongside that is protection of the PPF, the Pension Protection Fund. LEWIS: And how do you answer competitors to Heath Lambert in the same business, who are struggling to pay into their pension fund, to keep it going? They’re presumably making less or no profit as a result. Here’s a competitor who has in effect dumped their liabilities on you and is still trading profitably. NORGROVE: Well I think it’s an issue there of what would have happened even before the Pension Act was passed. I mean even in previous years, it could well have been the case that Heath Lambert would have restructured itself to avoid its pension liabilities or reached a compromise with the pension scheme under which the scheme liabilities were in fact capped at a very low level. LEWIS: So you’re saying it’s better for the pensioners, it’s better all round. Christine Farnish, are you convinced? Do you think that these safeguards are strong enough? It has to be going bankrupt or out of business and other people have to take a hit as well; the banks have to lose money as well. FARNISH: Well without knowing the full details of the case it’s hard to comment on that, but I think the real worry for us is that the people who are picking up the bill here will be the remaining private sector defined benefit pension schemes who are struggling anyway, so it’s just going to put companies off even more providing decent pensions. LEWIS: And do you have any evidence of that from your members - that they’re taking this as a way of saying well we’re going to pull out, we just can’t afford it? FARNISH: There is evidence; there are signs of that. I think this sort of example widely publicised will make the regulatory risk appear even more of a concern and some of these schemes might move offshore. LEWIS: Christine Farnish, thank you very much from the National Association of Pension Funds and also David Norgrove, chairman of the Pensions Regulator. Hundreds of thousands of elderly people may have to write to the Pension Service every month or miss out on money they’re entitled to. The problem faces anyone over pension age who gets the Government’s pension credit and lives off their savings. Pension credit tops up the income of pensioners if it’s less than £150 a week if they’re single or £220 for a couple, but the calculation also takes account of savings; and as savings come down, the amount that can be claimed goes up. As Money Box listener Paul Davis from Stratford found out, the problem particularly affects the quarter of a million people in care homes who pay their own fees like his 95 year old mother. Her savings are too high to get direct help with the care home fees, but she can get pension credit. Paul discovered the amount she gets should go up every month when she pays her care home bill. PAUL: Because she pays her own care charges, which are every four weeks, that means she has to dip into her savings and therefore her savings drop every four weeks and the calculation for her pension credit changes and she qualifies for a small addition, which is typically about £3 a week. LEWIS: But to get that extra £3 a week, a letter with bank statements has to be written every month. Paul of course does that for his mother, but he says the information from the Pension Service doesn’t warn people that a claim is necessary when savings fall significantly. PAUL: I think perhaps if they could spell that out a little bit more - if you are in a care home and you are paying your own charges, your circumstances will change every time you pay your charges and you should declare a change of circumstances – I think a direct instruction like that could make it a lot easier. It would at least make them aware that something has to be done. LEWIS: Well with me is Mervyn Kohler from Help the Aged. Mervyn, what are the rules about capital? KOHLER: You have your capital assessed by turning it into an income figure. Basically if you’re in a care home, £10,000 of capital is disregarded, but above that every £500 extra is deemed to be worth £1 a week. So if you’re paying (as Paul Davis’ mother is doing) something like £1,000 or £1,500 per month, that’s taking her down through three-ish bands of her capital and, therefore, bumps up the pension credit entitlement. LEWIS: So because her income falls by £3, the pension credit goes up by £3? KOHLER: Because her capital is falling. LEWIS: Her capital, yes. It is very complicated, isn’t it? KOHLER: It is. LEWIS: I mean her letter for example, which I’ve seen, says ‘your pension credit does not have to be looked at again until April 2009.’ There’s this assessed period when you’re not supposed to have to do anything. KOHLER: Well in all fairness, the pension credit is fairly simple to claim for your average person even if it’s impossible to work out what you’re actually entitled to be claiming and part of the deal is that you do get the amounts fixed for five year periods so that you only have to notify the Pension Service if there’s been a big change in your circumstances. LEWIS: So that obviously helps because you don’t have to constantly tell them if your income goes up a bit or you have a very slight change in circumstances? KOHLER: That’s the point, that’s the principal. But obviously the systems are not designed to deal with these cases which happen in difficult circumstances. I mean it’s a bizarre illustration of the complexity of our whole pension credit system. I mean both the Pensions Commission and indeed the Government have owned to the fact that Britain has the most complex welfare system in the world. LEWIS: Indeed and lucky for Paul’s mother that she’s got Paul to work it all out for her and do it for her. And of course it’s not just people in care homes. I mean obviously in her circumstances her savings are going down, as you say, by £1,000 or £1,500 every month, but people who are living off their savings, as many older people do, if they fall (from what you say) through a £500 barrier then they should get an extra … KOHLER: They would be entitled to an extra £1 or so a week. LEWIS: Yes. KOHLER: And of course the eligibility thresholds for pension credit are changed every year, every April, and if you made an application this year and just missed out, it could be that after the thresholds change next April you would be eligible for it then. LEWIS: Yes and of course we’ve had figures out this week, haven’t we, which your organisation’s analysed from the statistics division of the DWP, that well over a million people over pension age are still not claiming. KOHLER: That’s right. Currently, as of February at any rate this year, only 71% of the people entitled to pension credit are actually getting it. The Government has a modest target of getting 3 million households in receipt of pension credit by next April, which would be a level of 75%, but at the rate they’re going it looks as if that target might well be missed. And, as I say, even that is a modest target. LEWIS: And that will still leave a lot of people without. KOHLER: More than a million. LEWIS: Mervyn Kohler, thanks. And there are links on our website to all those figures and of course information about claiming pension credit. The new figures show the average is almost £40 a week for a single person, £50 for a couple, so well worth claiming. That’s at bbc.co.uk/moneybox. Now it’s more important than ever to understand our finances, whether it’s spending, saving or borrowing, but teaching personal finance has never been compulsory in school. Squeezing in lessons is difficult and many teachers feel they’re not really qualified to teach it. Now a new initiative in South London uses an outside agency called Kerching to visit schools to teach personal finance. Louise Greenwood’s been back to the classroom. TEACHER: I want you just to think for five seconds in your head about anything in the world that you think of when I mention money. Yes? CHILD: You can buy stuff. TEACHER: You can buy stuff. CHILD: You can save money. TEACHER: You can save money. GREENWOOD: 9 and 10 year olds at St. Anthony’s Primary School in East Dulwich with their thoughts about money and what you do with it. They’re among hundreds of school children in South London taking part in Kerching. It’s a day of personal finance education. The programme’s been developed by the private educational consultancy, SZ Education, along with Surrey University. Southwark is the first local authority to invite Kerching into their schools. CHILD: Mortgage TEACHER: Mortgage. Well done. What are mortgages to do with? Yes? CHILD: To get a house. TEACHER: Brilliant. GREENWOOD: The idea is to teach kids the basics of saving, spending and running a budget, skills they’ll all need when they’re older. So if they were each given £20 to spend, what would they do with it? CHILD: I would buy a box of chocolates for my mum. CHILD: I would buy books because I love books. CHILD: I’d put it into the bank or save it so when I’m older you can get stuff like a house and car. CHILD: I’d also buy some CDs. I’d probably get some pens for school. GREENWOOD: Do you think £20 is a lot of money? CHILD: It’s quite a lot and then it’s quite low, so I’d say it’s in the middle. GREENWOOD: Schools have had the option to teach personal finance for several years, but few do. This half-day course claims to cover the main themes of personal finance for younger children required by the Department for Education. Dominic Cook from SZ Education says response from schools they’ve approached with the course has been overwhelming. COOK: We knew we were going to do twenty schools in the pilots and within two days we had over eighty schools come back and say they wanted to receive it. Teachers feel that personal finance is something they’re not qualified to do. The usual response is, “I don’t know enough about this myself let alone being able to teach it to a classroom of children”, so it’s something that’s been well received by schools. When we sort of ring up and say we’d like to come in and talk to them about money for the day, they’re over the moon – “Yes please, please come in and do that. That would be fantastic.” GREENWOOD: The next exercise was designed to teach the children some of the skills of budgeting. They were given a basket of basic groceries and had to guess the price of each item – for example a pint of milk, usually about 35 pence, and a loaf of bread, about 50 pence. GREENWOOD: How much for a pint of milk then? CHILD: £1.45 GREENWOOD: A loaf of bread? CHILD: £2.95. CHILD: £3. GREENWOOD: £3 for a loaf of bread? CHILD: Maybe. Or maybe £2.50 or maybe £2. GREENWOOD: The courses are backed by £100,000 of commercial sponsorship from Barclays Bank. The idea of private money funding this kind of learning may not find favour with every parent, but the team is only invited into schools with the approval of the local education authority and the head teacher. St. Anthony’s head teacher, Stephen Owens, says he’s comfortable with personal finance being taught under these circumstances. OWEN: I think we live in the real world, don’t we, and we get funding wherever we can in education. The programme may be funded by the bank, but I don’t think the Barclays name was particularly emphasised this morning. Just as in the same way as perhaps dealing with literacy we take children to a theatre, in looking at art we take them to a gallery, in dealing with money and dealing with personal finance, then having somebody from the banking world just makes sense. GREENWOOD: At the end of the course, the children were all given their own budget planner and pen from Barclays Bank. But what else did they get from the day? CHILD: I learnt where to keep your money and to keep it safe and to look after it. CHILD: About how to manage finances. GREENWOOD: Did you know before? CHILD: Not really. CHILD: I’ve learned how to now keep my money safe and make sure that I know how to use it and when. CHILD: To keep the money in a safe place and when you go to the shop to not spend all of your money, to spend a half. GREENWOOD: 3,000 children in South East England will have taken part in the Kerching programme by the end of the year. Elsewhere, similar work is being done by the Personal Finance Education Group, a charity financially supported by the banks and building societies as well as Government. It hopes to raise up to £7 million over four years to roll out more classes across the UK. LEWIS: Thanks, Louise. And there’s more on that story on our website. And if you’re a parent, a teacher or a school governor, you can have your say on teaching finance in schools and who should pay for it at bbc.co.uk/moneybox. From August Premium Bond holders will have two chances each month to win a million pounds. The new double jackpot reflects a slight rise in the interest rate paid to investors and a change in the way the interest is shared out among the prizes. There’ll be fewer between £5,000 and £50,000, but more at £1,000 or less, and of course twice as many at a million. With me is John Prout. He’s sales director of National Savings & Investments. John, why have you made these changes? PROUT: Well what we like to do is to check with our customers – and there’s 23 million of them – how they want to see the bond structure develop, and we take regular research and it’s a balancing act. LEWIS: Well they’d like to win more presumably? PROUT: They certainly do. The big attraction in terms of the headlines is of course the two times a million now from August, but what we also find is that customers want to know that they’ve got a reasonable chance of winning a prize on a reasonably regular basis, particularly if they put in the average holding of just over £1,000, and that’s what we try and reflect in the draw structure. LEWIS: Yes, so with £1,000, you’d win one prize what every couple of years? PROUT: Yes, it works out about that. LEWIS: But you haven’t said very much in your publicity, have you, about cutting back on these middle range prizes - £5 to £50,000. Why did you pick them to cut back on? PROUT: Well they are modest reductions. In fact there are fourteen less prizes between £5,000 and £50,000, so it’s a modest reduction. We’ve added 8,000 £100 prizes, 6,000 £50 prizes, so this is reflecting the fact that people will have a better opportunity to win. And of course the two times a million, the way I like to describe that is 24 millionaires a year instead of 12. LEWIS: Yes, I’m sure you do. And coming back to the 50 £100 prizes, of course people look on that as a sort of return, don’t they, because if you’ve got the maximum holding of £30,000, which a lot of people I believe do, then they can expect reasonably, by the laws of chance, to get a reasonable return on that money. PROUT: Yes, about 200,000 people have actually invested the maximum and if the statistics work through that would lead you to win around about 15 prizes per year. LEWIS: Yes. And what sort of rate of interest do you pay on this? PROUT: Well the actual rate as of August when the new million comes in is 3.25%, but of course that’s tax free so you know that always has to be sort of figured into the calculations. LEWIS: Yes, so it’s the equivalent of about just over 4% basic rate and 5.4% for others. PROUT: It’s just over 4% for a basic. LEWIS: But of course if you take out the big prizes, then it’s less than that, isn’t it, and the chances are you’re not going to win a million pounds, you’re not going to win £500,000. If you take the big prizes out, it comes down closer to 3%, doesn’t it? PROUT: Well even at 3%, for a higher rate taxpayer that works out at 5% in terms of gross and for a basic rate taxpayer it’s just under 4%, so it’s still not a bad return. And I think the way that we always describe … I mean they are an incredibly popular product, but this is a bit of fun as well and it probably sits alongside other savings products with most people. LEWIS: And what other changes are you planning? PROUT: Well the main changes are making it easier to buy Premium Bonds, so we’ve got 15,000 Post Offices where you can obviously get them and I think most people know that. Last year we made it much easier to buy them on the telephone. We introduced Internet purchase opportunities in January this year, so it’s very easy to buy online and we’re selling 50 million a month in fact through the Internet. And recently we also introduced a standing order opportunity as well. LEWIS: John Prout of National Savings Investment, thanks. And by my calculations it’s about a billion to one of winning a million pounds even with the new odds with just one bond, though of course very few people have that. And we’ve another example this week of a bank taking more in charges – this time for a service that’s currently free. First Direct has written to 450,000 customers who receive free mobile text banking messages and told them that in future they’ll often have to pay a fee. Under the plans, people who’ve chosen to receive a free text message when money is paid in or if they’re close to going into overdraft will now pay a £2.50 monthly charge. Money Box’s Chris A’Court has more on this. A’COURT: Yes, Paul. First Direct’s the biggest player in text message banking by far and has run its free service since 1999. What happens, as you’ve said, is you tell the bank when to message you – for example if you’re going into overdraft a warning text comes to your phone and you can either stop spending or put some money into your account to avoid going into the red and avoid First Direct’s hefty overdraft charges and penalties – but from September customers will find £2.50 is taken from their bank account each month as payment to receive such warnings. Put another way, it’ll cost customers £30 a year and provide the bank with millions more in income, which will help pay for the messages it sends but also boost profits. LEWIS: Yes. And some types of text message will remain free though, won’t they? A’COURT: First Direct’s going to send a limited number of mini statements to customers’ mobile phones for free each month, but not the so-called event alerts – the most crucial ones such as an overdraft warning or a message to tell you that your salary’s been paid in. Customers who are already paying £9.50 a month to belong to the First Directory Scheme will keep getting all their messages without any further charge. LEWIS: And what does First Direct say about the reasons for the change? A’COURT: Well no one at the bank was available to be interviewed on Money Box, but a spokesman told the programme that it’s always reserved the right to charge for text message banking; and with it now sending 46 million messages to customers each year, it needs to consider costs. It says 43% of text messages it sends are of the event type that will incur a charge in future, but the remaining 57% are for mini statements which will mostly remain free. LEWIS: And is there any alternative? A’COURT: Well the problem is there really isn’t a direct alternative. Lloyds offers a free text messaging service and Cahoot, but neither are providing exactly what First Direct does. LEWIS: Thanks very much, Chris. And finally Equitable Life has sold the portrait of one of its early presidents, painted by Thomas Gainsborough, and the hammer fell on this picture at £550,000 when it was sold at Christie’s salesroom on Wednesday night. It’s a portrait of Charles Gould. That will leave Equitable, on my calculations, with around £530,000. The society has now sold almost all its historic assets, raising around one and a half million pounds for its members, enough to pay for about two months of the society’s legal costs suing auditors and past directors. Well that’s it for today. You can find out more (as ever) from the BBC Action Line – 0800 044 044. Calls are free – 0800 044 044. And of course from our website, bbc.co.uk/moneybox, where you can contact us, have your say on education in schools, and listen to the items on the programme again. There are personal finance stories on Working Lunch, BBC2 weekday lunchtimes. Don’t forget our phone-in Money Box Live on Monday afternoon. This week I’m taking your calls on the Child Trust Fund. I’m back next weekend with Money Box. Today the producer was Chris A’Court, the reporter Louise Greenwood, and I’m Paul Lewis.