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 4 SEPTEMBER 2004 12.00-12.30 BBC RADIO 4 LEWIS: Hello and welcome back to Money Box. Today we’ll be revealing how a bank clerk in New York stopped nearly 200,000 British pensioners getting their money on time. Does this undermine the new electronic pension payment system? There’s a fresh crisis for company pensions: 20,000 people may lose half their pension despite two new compensation schemes. I’ll be asking why the Government has decided against a limit on the cost of borrowing. GIBBONS: We’re dismayed by the decision. It’s letting down some of the poorest people in the country, particularly those people who borrow from doorstep lenders. LEWIS: And looking at the higher cost of mortgages and the higher return on savings after another rise in interest rates. The Government is to hold urgent talks on Monday with the Post Office after its new electronic system of benefit payments went wrong. 190,000 pension payments were affected. The computer paid 25,000 pensioners double the right amount and then closed down for three and a half hours, leaving the rest with no way of getting their week’s money. It’s a blow to the Government’s plans to move all benefit and pension payments from the old order books to a new electronic payment system. Sally West of Age Concern explains how it affected pensioners throughout the country. WEST: We heard from a number of older people who’d gone to the Post Office, found they couldn’t get any money. And, apparently, the Post Office staff were told by their help line that people would have to just go away and come back every half an hour to see if the system was up and running again. LEWIS: I mean to be fair to them, it did get up and running, didn’t it? It was closed for about three and a half hours, so I suppose they could get their money out eventually. WEST: Well I think the one thing people actually didn’t know – whether it was going to be down for five minutes or three days. But also we’re talking about older people - perhaps with mobility problems, maybe needing to get the bus back to their village - and it’s just really not acceptable people are hanging around worrying about whether they’re going to get the money that’s due to them. LEWIS: Now the Government has said in the past there would always be emergency systems in place if things did go wrong. Was there any sign of those? WEST: Well when we’ve asked about what the provisions will be when there’s problems, what we’ve been told is people will have to ring the Pension Service. And some of the people that contacted us said that they’d tried to do that, but presumably because everybody else was doing that the numbers were engaged. And of course there isn’t a local Pension Service office that you can drop into and ask about your pension; and of course if you’re standing in the middle of the high street wondering when the Post Office is going to be able to pay you your benefits, that’s not always easy to contact the Pension Service. LEWIS: How crucial is it for pensioners in this position to get their money today? People might think well Monday, Tuesday - does it matter? WEST: A lot of older people who live on very low incomes budget very carefully and manage on a week to week basis, so it wouldn’t be uncommon for when people go along to get their pension book to be virtually out of money and a day could mean a day without being able to go shopping and getting the food you need. LEWIS: Sally West. Well Money Box has learned that state pension payments now pass through the US bank, JP Morgan; then to the Post Office. A clerk working on the East Coast of America apparently spotted the overpayment and pulled the plug, causing chaos across Britain. Well live now to the Government minister in charge of the new system of direct payments, Chris Pond. Chris Pond, the old system provided the right money at the right time. This one hasn’t, has it? POND: On this occasion, it didn’t, Paul, and it is quite unacceptable that pensioners were left in this position. Even if they did have something left in their purse, many of them will have gone along to the Post Office, expecting to take out enough to do their shopping, and the very fact they weren’t able to do that is quite unacceptable. We’ve had an apology from the Post Office and I had an urgent discussion with the Chief Executive of the Post Office yesterday, who reassured me that he has spoken very firmly with the suppliers, with JP Morgan. They were not authorised to turn off the system. I have to emphasise this was not a computer failure. Someone made a decision to do something unauthorised, which was to turn it off … LEWIS: But why are they allowed to do that? POND: … and I’ve made it very clear that we want proper contingency arrangements. They’re not allowed to do it, Paul, under the contract. They should first of all check with the Post Office. They didn’t check either with the Post Office or with the Department for Work and Pensions that they were going to do this, and I’m afraid that this was a management error. And we have said very clearly that first of all some of the stories we’ve seen that pensioners may find themselves in court to pay back the money, from our point of view is absolutely absurd. We have no intention whatsoever of taking any pensioner to court and I’ve made it very clear indeed. We do not expect either the Post Office or its suppliers to be pursuing pensioners for repayment of this money. LEWIS: Right, so the 25,000 people who were paid twice, they’re going to be able to keep the money? POND: Well many of those will obviously wish to pay it back. They will recognise it’s an error and many of them will want to do that. What we are saying to both the Post Office Limited and to its suppliers is that, frankly, we do not want our customers – pensioners or others – approached in any way which is intimidatory to get recovery of this money. LEWIS: And what about the people who couldn’t get their money? What are you going to do about them? Because there were people, as we heard, in the street. They didn’t know who to ring. They tried to ring. The numbers were engaged. It’s the Government that hasn’t got the contingency systems in place as well, isn’t it? POND: Well that’s why all of this was so unacceptable. I have to say, Paul, that the Post Office card account is a Post Office product and it’s the Post Office who has or has not got the appropriate contingency arrangements. LEWIS: Well no, it’s your help line. POND: And in my discussions with the Chief Executive yesterday, I made it very clear – and he accepts – that the contingency arrangements they have are not acceptable. Clearly if the whole system is taken down in this way, then the Pension Service, including the local Pension Service, is going to be unable to cope with a flood of calls like this. And that’s why we need to make sure that the contingency arrangements the Post Office has to ensure that people get their emergency payments – there are arrangements in place that the Post Office can pay £20.00 emergency payments – but that system itself broke down Monday before last and we need to make sure it never happens again. LEWIS: Indeed. Chris Pond, thanks very much. And we did ask the Post Office to come on the programme but no one was available. Well company pensions are also facing another major crisis. Despite Government promises of schemes to deal with the pension shortfalls, 40,000 more people face losing some of the company pension they’ve been promised. Money Box was the first to report the difficulties with the pension scheme at engineering firm Turner and Newell in July. Over the summer things have got worse, and it could become the biggest and most damaging of recent pension scheme collapses. Unions are calling for urgent action. John Rowse, National Secretary of the T&G union, has been involved in recent negotiations. ROWSE: Time is running out. The solution we want is for continuing the scheme. If they wind the scheme up, then everybody loses. Somebody will have to pick up the responsibility for what’s happened to this pension scheme. LEWIS: But at the moment no one is. The Government won’t say if the scheme will be covered by a plan for financial assistance, which it announced in May. And the company’s American owner, Federal Mogul, wants to get rid of the UK pension scheme. It’s offered a one off payment to end its liabilities, but the trustees of the T&N retirement benefit scheme say it’s not enough to keep the pension promises. Mike Lord is the trustee’s spokesman. LORD: Representatives of T&N’s American parents – that’s Federal Mogul – have made an offer to the trustees of 130 million US dollars in full and final settlement of the claim. We’ve carefully considered that and concluded that we simply can’t support the offer. Both our financial advisers and the UK administrator and their professional advisers believe the offer’s insufficient, and in fact we believe that substantially more money could be made available. LEWIS: 130 million dollars – around 71 million pounds – is less than a tenth of the scheme’s shortfall, which is put at well over 800 million pounds. There are now fears the scheme may have to be wound up. 20,000 current and past employees, who’ve not yet retired, may end up with less than half the pension they were promised. Another 20,000, already retired, may see their pensions frozen. Money Box’ Louise Greenwood is in Chapel-en-le-Frith in Derbyshire where Turner and Newell has one of its biggest plants. GREENWOOD: Well I’m here in the heart of Chapel-en-le-Frith in the town’s social club on the high street where workers past and present from the Federal Mogul plant gather together to enjoy a drink. In fact we’re just a stone’s throw from the factory itself, which makes brake linings under the household name Ferodo. Hundreds of workers are finding, to their shock, that their carefully laid plans for a secure retirement are hanging in the balance. And I’m joined now by some of those workers. Firstly with me is Norman Prime. Now, Norman, you actually worked at the Federal Mogul plant for fifty years. PRIME: 50 years – yes, that’s correct. GREENWOOD: How is this situation going to affect you? PRIME: Well it’s not going to affect us as much as the people in work or suspended and we feel very sorry for them, but it’s our annual cost of living they said would be frozen so we shall be stopping on the pensions that we’re currently on. A lot of pensioners are hung up about this and whilst they don’t like obviously standing still and they don’t like what’s happening to the others, they realise that possibly the pensioners that are retired have got the best part of the bargain. GREENWOOD: And with me also here is David Lewis. Now, David, you’re still actually working at the Ferodo plant? LEWIS: Yes. Yes, I was hoping to finish next year after nearly 34 years service. GREENWOOD: How much were you hoping to get? LEWIS: Well I’d had me figures of £46,000 lump sum and £185 a week. Now obviously we’re not looking at anything, are we, at all? It’s all up in the air. So just hoping something’ll be sorted out, you know, that’s all. GREENWOOD: Have you been given any idea at all about how big the cut in your pension could be? LEWIS: No idea at all at the moment. We’re just deferred members and we’re not looking at anything at the moment. So obviously the talks are ongoing and we’re trying to get out as much as we can out of ‘em. GREENWOOD: Well I’m also joined now by someone who perhaps is in – dare I say it – the worst position of all. Now Nick Radcliffe, you formerly worked, didn’t you, at Ferodo and you gave up your job some years ago? RADCLIFFE: Yes, I took voluntary redundancy 2 years ago after 23 years service. GREENWOOD: So you’re really what’s called one of the deferred workers? You’ve put your pension off for the time being? RADCLIFFE: That’s correct and it looks very much like there’s not going to be anything there in the pot at the end for me. GREENWOOD: Well that’s the picture here in Chapel-en-le- Frith. Now back to you in the studio, Paul. LEWIS: Thanks, Louise. Well with me is Malcolm McLean. He’s Chief Executive at the Pensions Advisory Service, OPAS. Malcolm, how can this happen? The Government’s supposed to have put two protection schemes in place. McLEAN: Well our experience is very similar to the report that Louise made there. We have had a number of people coming to us extremely concerned indeed, so we understand that and there is a problem here – a major problem in fact. The Government has, as you say – or is bringing in – a pension protection fund, which takes effect from next April. It’s not retrospective and it only covers victims of final salary scheme wind-ups where the wind-up takes place after next April or an insolvency event that’s occurred before April. So I think that’s unlikely to apply to this situation. The other scheme that the Government has brought in – slightly reluctantly, I have to admit, but they have done so, or are planning to do so - is what they call a Financial Assistance Scheme. Now I think it’s worth emphasising this is not a compensation scheme, it is not going to give people all the money they’ve lost, and the details of this are very sketchy indeed at the moment. The Government has been consulting. They’ve said they’re prepared to put 400 million into it. There are already 65,000 people who’ve lost their pensions, so I’m just not clear whether this will be sufficient for these or indeed whether they’ll be given access to it. LEWIS: Well yes, they wouldn’t tell us. A spokeswoman said details of the scheme, including who’ll be eligible, continue to be worked on. So they may not be eligible, but if they are the 400 million will have to stretch across another 20,000 people. McLEAN: Yes, yes, we’ll need to see the details of that. My understanding is the Government intends to publish proposals on this in the form of draft regulations in round about November time, so hopefully it will not be too long before we know more about that. LEWIS: Well we heard the human problems there from Chapel en le Frith. What hope is there for those people? What can now happen? The Government’s a bit uncertain. Is there any hope through the company? McLEAN: Well the scheme’s not yet in wind up. The company have made an offer, which has been rejected. I assume that that offer has been taken very seriously indeed by the independent trustee who will have access to all the facts and information and hope to know what is the necessary funds that need to be put in. The last I heard was that the company was now considering some sort of market test of its UK business to see whether money could be produced that way. I think what we’d all like to see really is this scheme to be kept going so that there is sufficient money to meet the pension promises that have been made, that people have a right to expect, and hopefully something can be done about it. But at the moment I think things are uncertain and I can well understand people feeling very apprehensive indeed. LEWIS: Malcolm McLean, thanks. And we also did try to get the Department for Work and Pensions to talk about it. They wouldn’t come on. And several MPs whose constituents are involved also didn’t return our calls. The Government has decided it won’t place an upper limit on the rate of interest that can be charged on loans. That will allow some lenders to carry on charging the poorest borrowers interest rates of well over 100%. Campaigners had been hoping that an upper limit would be introduced as part of the major changes to consumer credit announced earlier this year. Last April Money Box reported on the law in Germany where banks are not allowed to charge customers more than about 20%. But after months of research, the Government says such a cap here would limit credit for low-income households and push them into the arms of the loan sharks. Damon Gibbons, Chairman of the ‘Debt on our Doorstep’ campaign, disagrees. GIBBONS: We’re dismayed by the decision. It’s letting down some of the poorest people in the country, particularly those people who borrow from doorstep vendors who would have benefited significantly from a cap on interest rates. In effect, the Government is going cap in hand to big business; and if that’s where its priorities lie, then unfortunately ‘Debt on our Doorstep’ can do nothing other than oppose that and we won’t be letting the issue lie. LEWIS: Well the minister responsible for the decision is Gerry Sutcliffe. I asked him why no ceiling on interest rates. SUTCLIFFE: We looked at the interest rate ceilings, but on balance, on the evidence that was presented to us, don’t feel it’s appropriate because what that might do in the very early stages is take people out of the legitimate market and hand them over to the very people we don’t want to, which will be the loan sharks. LEWIS: But that’s certainly not what Money Box found earlier this year. We went to Germany. We spoke to a lawyer, a debt advisor who works with people in debt difficulties, and she said the interest rate cap helped people there. It wasn’t perfect, but it was absolutely better to have it than not to have it. SUTCLIFFE: Well that’s the case in Germany. We looked at European countries. We also looked at Ireland as well. And on balance, our research on the aspect affecting the UK market persuaded us that interest rate savings weren’t appropriate for the UK market at this present time. LEWIS: So that means you’re happy with companies charging 177%? You think that’s reasonable? SUTCLIFFE: No, I don’t. I mean on the face of that, of course it’s not. But you’ve got to look at the products that are on offer, and the rates of interest for small loans pushes up that rate. What I don’t want to see happen is those people going to the illegitimate loan sharks and being put under pressure. LEWIS: Yeah, we’re not talking about loan sharks here though, are we? We’re talking about respectable companies. We’re talking about Provident Financial. It lends you £300. You pay back £495 in just over a year. That’s £195 in interest. I’m asking you if you think that’s reasonable? SUTCLIFFE: Provident Finance products will be alongside everybody else’s products and the consumer will have the right to choose in the full knowledge of what they have to pay back. People have got to be given full advice about what they are letting themselves in for and then they can make that decision. LEWIS: Yeah, I mean I think at the moment I think people do understand what they’re letting themselves in for. They just don’t feel they have any choice. It’s not the clarity of what, for example, Provident says. People know they’re charging 177%. It says it on the document. They only take it because they’ve got no alternative. SUTCLIFFE: Well there will be alternatives. LEWIS: Such as what? SUTCLIFFE: The credit unions. And we’ll be looking at credit unions to give them support. But if we’re going to you know concentrate on one product, then that’s not what we’ve done. We’ve looked at the consumer credit affecting the whole range of provision. We’ve listened to the National Consumers Council, we’ve listened to Citizen’s Advice who all oppose an interest rate ceiling. LEWIS: Well they do certainly at headquarters level. But, again, when Money Box went to the grassroots earlier this year, the people in CABs, the people in debt advice agencies who worked on the ground with real people with debt problems did not oppose the cap. They all called for a cap. They said it would help people more than anything. SUTCLIFFE: Well as the minister responsible, I have looked at all these situations, looked at the reports that have been given to me. The Government’s reaction to the change in consumer credit has been welcomed. The one area of disagreement is that of interest rate ceilings. Our concern is that if you put the ceiling in, you take people out of the legitimate lending market. We want to improve their access and acknowledgement of dealing with finance, and at this stage we think the interest rate cap would not do that. LEWIS: Consumer Affairs Minister Gerry Sutcliffe. Well Money Box may have been on holiday for the summer, but the Bank of England certainly wasn’t. It put interest rates up again in August. Money Box’s Chris A’Court has been looking at the figures. A’COURT: Yes, many people are coming back from their holidays, Paul, facing another rise in their monthly mortgage payments when the bank put up its base lending rate to 4.75% in early August. It was the fifth interest rate rise in the year. Now that means that people with a £100,000 repayment mortgage are now finding they’re paying £70 more each month compared with last September; and from last Wednesday, the standard mortgage rate for customers of three of the biggest lenders – Halifax, Abbey and Cheltenham & Gloucester – went up to 6.75%. They all passed on the latest quarter percent rise in interest in full. And it does seem that those five mortgage rate increases are now having some effect on the property market. On Friday, Halifax reported that house prices fell last month for the first time in 2 years by just over half a percent. LEWIS: Well of course, Chris, rises in interest rates are good news for many of our listeners who have savings rather than debt. A’COURT: Indeed and the returns on savings are going up. For example, ING Direct is now offering 5% on all savings of £1 or more. But ING decided not to pass on the latest bank increase in full, preferring to limit it to just 0.15 of a percent. It’s a phone and internet account, as we’ve said before. And among the best interest paying savings accounts on the high street are still the Alliance & Leicester Easy Saver and Abbey Flexible Saver offering 3.55% interest. All those rates are reduced, of course, if you pay tax. LEWIS: And what about then the best tax free cash ISA rates? A’COURT: Yes, a cash ISA is still the best place of all for most people to save into. Interest there is tax free for everyone, of course. Among the best now are Abbey’s postal ISA, paying 5.3%, and the Yorkshire Building Society’s internet ISA paying 5.2%. LEWIS: Thanks, Chris. And with those high rates available, it’s of course no surprise that money’s being put into cash savings rather than investments. But Prudential is about to launch a new product called Pru Fund, which it hopes will tempt us back into riskier investments. The man who runs the Pru is Chief Executive Mark Wood who explained it to me. WOOD: What we’ve done is to move away from having complex notions such as an annual bonus and separately a bonus at the end of the contract and a market value adjuster – this concept whereby the value of the investment gets changed retrospectively effectively. Every day people can establish the value of their investment and see exactly how the investment is performing. And on top of that, what we’ll do each quarter is to give people a projection of our expectation of the return that they’ll make on this investment. LEWIS: You say that it’ll be a projection of your expectation. Will it in any way be a guarantee? WOOD: No, it will not be a guarantee in any way. And I think we need to be absolutely clear: the return on this product is projected to be higher than the guaranteed return people get when their money is on deposit, where of course they are guaranteed to get their capital back, but the capital is at risk and so there is a reward for taking the additional risk. LEWIS: You’re suggesting in your literature it might be 5% a year. That’s the kind of amount you’re putting in people’s minds. WOOD: Well the 5% is after all the charges and it’s also after the deduction of basic rate tax, so people need to make the comparison between the cash they will actually receive from this investment and seemingly higher rates they might receive elsewhere but of course against which tax has to be deducted if they’re taxpayers. LEWIS: But your own figures show that if I’d invested £30,000 in the Pru Fund 5 years ago, I would have made just under 2% a year over that period. WOOD: Correct. And I think what that shows is the relatively strong performance of a fund such as ours relative to all of the other things that people could have invested in. And, remember, this is a time when the stock markets fell by 50% for one annual period – very dramatic drops in markets. LEWIS: But you can understand why people when they see a guarantee of 6.1% on a fixed cash product where they get their capital back and 6.1% a year for 5 years are more attracted to that than your non-guaranteed 5% over 5 or 7 years? WOOD: When we talk to our customers, our research tells us that people have more than sufficient cash – in many cases – in these guaranteed funds and are becoming a little bit frustrated by the return that they’re achieving, and in some cases are ready to take a little bit more risk for the prospect of a higher return. LEWIS: Or the prospect of losing some of their capital. WOOD: Well, that’s what risk is. LEWIS: Chief Executive of Prudential, Mark Wood. Well live now to Patrick Connelly, Research and Investment Manager, at John Scott and Partners. Patrick, this is basically what we used to call the old with profits bond but it’s been modernised, it’s easier to understand apparently. Is it attractive? CONNELLY: It certainly has been modernised. I wouldn’t say it was particularly that much easier to understand. LEWIS: I’m glad you said that because I got confused by it. CONNELLY: I think you touched on a very important point to mention the comparison with cash accounts because at the moment cash accounts are very competitive compared to the likely return you’re going to get from this sort of product. The product itself may be recommended by an adviser who is trying to earn their money by trying to accumulate commissions because very simply it pays a very high level of commission, and I think it’s very unlikely to be recommended by somebody who’s a fee based advisor. LEWIS: Ah, right. I mean it did strike me, and I was trying to put this point to Mark Wood, that you can get 5, even 6% if you tie it up for cash. Now that is taxable compared with 5% tax free, in most cases, on this. So you’re taking a risk for very, very little extra. CONNELLY: Absolutely. And if you’re looking at something like a guaranteed income bond, well that’s offering you a return of about 5% per annum after basic rate tax anyway, so there is a direct comparison with the Prudential product whereby one of them is no risk and obviously with Prudential there is risk attached to it. LEWIS: And looking ahead, Patrick – I mean Money Box back on the air; there’s a new season; the stock market I think closed at was it a 4 month high on Friday. What’s the general outlook for savings? Is it cash or is it something that perhaps we might take a bit more risk on? CONNELLY: I think it’s fair to say that people are still very nervous in investing in anything other than cash. And I think it’s also fair to say they’ve still got very little trust in the financial services industry as a whole. Now in order to improve that, it’s essential that the industry make more efforts to be seen as more professional and more trustworthy. And that’s going to be very, very difficult to do when you have products paying such high levels of commission such as this which, arguably, can taint advice given to consumers. LEWIS: Okay, well let’s see what happens. Patrick Connelly, thanks. That’s it for today. You can find out more from the BBC Action Line 0800 044 044 and our website: bbc.co.uk/moneybox. More finance – Working Lunch BBC2 weekday lunchtimes. Monday’s our phone in Money Box Live. This week Vincent Duggleby takes your calls on saving and investing. I’m back next weekend. Today the reporter was Louise Greenwood. The producer Chris A’Court. And I’m Paul Lewis.