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 PRINTED HERE. MONEY BOX Presenter: Paul Lewis TRANSMISSION 6th SEPT 2003 1204 – 1228 RADIO 4 _____________________________________________________________________ ANNOUNCER : It’s four minutes past twelve and time for Money Box with Paul Lewis. LEWIS: Hello and welcome to the new series of Money Box. A lot's changed in the world of finance over the summer; we’ll be looking at the prospects now for your savings, mortgages and investments. We go to America to look at how company pensions are protected there. It’s an insurance scheme called PBGC which our government wants to copy but we find PBGC in deep trouble. MAN: The manufacturing base of this state is completely going under and sooner or later PBGC is going to be in the same condition as we’re in – bankruptcy. LEWIS: And LloydsTSB is refusing to pay the full compensation due to people who bought investments that promised big returns but delivered large losses. First though, mortgages, savings, debts and investments. Underlying all those things of course – the level of interest rates. Rates are at their lowest since 1955 and a couple of months ago the talk was they’d fall further but over the summer that mood has changed. On Thursday the Bank of England held interest rates at three and a half per cent and the next move, when it comes, is expected to be up. That’s because inflation has stayed consistently above its target of two and a half per cent. Raising rates should curb spending and bring inflation down but when will the Bank make that move? Rosemary Radcliffe is an economist and advisor to PriceWaterhouseCoopers. What was she expecting? RADCLIFFE: I think the most likely direction is probably now up rather than down. I think much depends though on precisely what happens with the UK economy and for that matter with the wider global economy over the next few weeks and months in which case I think we might see rate hikes as we move into 2004. LEWIS: Of course we’ve had figures also out in the last few days about the record levels of debt secured on property, some of it just to pay off short-term loans. How worried are you about the levels of debt, is that a future danger for the economy? RADCLIFFE: They are standing at record levels. Consumer debt as we know is extremely high. Right now again I’m less worried about that because consumers are in a position to service that debt, interest rates are pretty low and although the economy isn’t as strong as it might be unemployment is relatively low and people in work are still continuing to thrive. LEWIS: But if rates go up that could really pull the rug from under a lot of people RADCLIFFE: That is I think the thing to worry about really. Basically the UK economy has been held up by consumer spending in the last few years and consumer spending has been on the back of increased borrowing. We really can’t go on like that indefinitely, there’ll have to be some amelioration in the rate of growth of consumer spending. Consumers will have to cut back on their borrowing a little bit and if we do see a rate hike well then some people may find that servicing those very high levels of debt becomes quite problematic. LEWIS: How worried are you about house prices? They’re still rising though not as strongly as they have been. How much longer can house price rises continue at the sort of levels we’re seeing? RADCLIFFE: Well of course one of the consequences of the price rises we have seen is that consumers have been more confident to go out and do this borrowing which has enabled them to keep spending and keep the UK economy growing, if not very powerfully at least growing. But I do think looking ahead we are bound over a period of time to see some reduction in the rate of increase in house prices, in the long term there has to be a reasonable relationship between house prices and peoples’ incomes but that could be over quite a long period of time, it doesn’t have to happen in a rush. LEWIS: So will there be a house price crash? RADCLIFFE: I don’t think that as we sit here that that is the most likely outcome. I think much more likely we’ll see a gradual reduction in the rate of inflation. I think the answer to your question is ‘maybe’ – but it’s not the most likely outcome. LEWIS: Rosemary Radcliffe of PriceWaterhouseCoopers and she warned of an interest rate rise at the turn of the year. Now if that happens it will as she said be a blow to people who’ve borrowed heavily to buy their home. Even a half or a one point rise could devastate finely balanced household accounts. Latest figures from the Bank of England this week show that we took out a record twenty five point six billion pounds of mortgages in July alone. Much of that is thought to be for remortgaging with many people borrowing more to spend as Rosemary Radcliffe said, or to pay off other debts. With me is Ray Boulger who’s Senior Technical Manager at mortgage brokers Charcol. Ray do you see signs of this change of mood over the summer, that rates are now on their way up rather than down? BOULGER: I think the most obvious sign of that is the way we’ve seen fixed rates increasing over the last couple of months. If you go back about two months you could get a fixed rate for two or three years at about the same rate as you would pay for a good discount or tracker rate, now you’ll pay about one per cent more. That’s simply the banks and the building societies reacting to an increase in the cost of funds on the money markets. LEWIS: Yes and we saw Nationwide raise its rate by, I think, point four percent this week didn’t we? BOULGER: That’s right and they’ve raised it by point five per cent only two or three weeks earlier so the banks and building societies have in fact put their rates up twice over the past few weeks. LEWIS: Given that do you think that if rates do rise again, around the turn of the year as Rosemary Radcliffe said, there’s a danger that people will be over extended in their borrowing, they won’t be able to meet the repayments? BOULGER: I think the key thing is how much rates rise by. Obviously those people who’ve taken a fixed rate are not going to be affected and generally the advice we would give is that anybody who is borrowing an amount which means their monthly payments are at a level where they actually couldn’t sustain much of an increase – we would suggest they go for a fixed rate anyway LEWIS: Even at the higher levels they’re now at? BOULGER: Well that’s what we were suggesting. I think now the situation’s rather different because money markets are effectively already discounting any increase in base rate later this year LEWIS: So the rates reflect the fact they expect them to go up later in the year? BOULGER: Absolutely. I mean most of the big lenders’ five year fixed rates now are in the region of four and three quarter percent. You can get a good two or three year discount under three and a half percent. So effectively unless base rates go up by more than one and a half percent you’re actually going to be better off on the discounts. So I think that although there are still a few cheap fixed rates around, such as Britannia who’ve got two years fixed at three forty nine, Coventry have got two years at four twenty five – although that’s going next week, so if you want a fixed rate there are a few good deals but if you missed the great deals then I think there’s now a good case for going for a discount. LEWIS: Briefly Ray, house prices. Rosemary Radcliffe says price rises can’t go on forever, we’ve heard that before. Do you see any sign that they’re really coming down or that the price rises are not going up so much? BOULGER: Well interesting in the South the market has started to pick up again, still fairly modestly but since the Iraq war there’s definitely been a return of confidence, including at the top end, so the South is improving, the North is slowing down, but for the foreseeable future, unless we get a rate hike, then I think prices are still going to go up. LEWIS: Ray Boulger thanks very much, from Charcol. Well rising interest rates should be good news for savers but despite the predictions of rate rises over the summer banks and building societies have been busy cutting the interest they pay us on our savings. Louise Greenwood’s with me today, she’s been finding the best deals still around. GREENWOOD: For people with small amounts to save the Dutch bank ING Direct was the market leader before our summer break offering 4.3% on savings accounts but last Friday the bank finally bowed to pressure and cut that rate to 4.1% - but it remains one of the best deals on the market. The account is operated by Internet, post or telephone and interest is paid monthly. Apart from ING the Scarborough Building Society is paying annual interest at 4% on its Oneplus Saver postal and telephone account. For those with a bit more to save the Birmingham Midshires telephone tracker is paying a bit more, 4.35% to all new customers but you must have a minimum of £5,000 to invest. Those stuck with the first issue of account are getting less, 4.1%. And Scottish Widows has pulled a similar trick with its Instant Transfer account, offering nearly 4% to new customers but paying just over 3% to existing ones. LEWIS: And what about Internet only accounts Louise? They used to be best. GREENWOOD: Well they’ve slipped quite a bit. The best deal now is the Tracker Online from the Northern Rock paying annual interest of 4.15% on anything over a pound, the Halifax Websaver and Abbey National Esaver are both paying annual interest at 4% LEWIS: And on the high street? GREENWOOD: The pickings here are much more modest. Alliance and Leicester’s EasySaver is still the best on offer paying 3% on anything over £1 LEWIS: And finally Louise, cash ISAs – tax free interest GREENWOOD: Well the best instant access cash ISA is still the Kent Reliance offering 4% but Paul, as we’ve said before, inflation often makes such interest rates look pretty meaningless. It’s running at around 3% so even tax-free savings are really struggling to keep pace. LEWIS: Thanks Louise. Well those savings rates may be little enough so should you be tempted to put your capital at risk on the stockmarket to try and get a bit more? The price of shares in our biggest hundred companies has risen nearly 8% since the start of the year, indeed it has gone up 4 ½% while we’ve been off the air, so is now the time to be investing in shares? Live now to Ipswich to speak to Brian Tora, Director at stockbrokers Gerrard. Brian has the outlook for shares improved over the summer? TORA: The outlook has. Shares after all are looking forward to what’s going on in the economy and most of the information we’ve had from the US and indeed from this country has been quite encouraging. It looks as though the American recovery is beginning to pick up a little bit of speed and overall most companies who’ve been reporting in the last few weeks have produced better than expected profits. LEWIS: So do you think this is the start of the stock market going back to its generally rising stage so it will go up and up each year, certainly by slightly more than investments in banks or are we at a sort of flat area where we really don’t know what’s going to happen? TORA: It’s hard to be certain this momentum will be maintained because we’ve really had quite a strong recovery. The market has come up by a thousand points from the low point it reached back in March and overall shares don’t look outstandingly cheap – they don’t look expensive but they’re no better than fair value so my feeling is that the news we’re seeing is enough to support the market but it may not be enough to drive it on a lot further. LEWIS: So we should be looking perhaps at the dividends that are paid, at the sort of investment returns, rather than for capital gains. TORA: That has certainly been much more of a focus recently even Microsoft, a company that has never paid a dividend in its life actually has announced that it’s paying dividends and indeed it has put its dividends up above the level that it originally forecast it would pay so yes dividends are important and there are plenty of companies out there, good companies that pay dividends that will really equal what you can get from a bank deposit account. LEWIS: People have realised though haven’t they that there are risks in the stock market? Do you think that retail investors, ordinary people with a few thousand pounds, a few hundred pounds maybe, to invest, are going back into the market? TORA: All the indications are that they have returned to the market. The volumes of trading on the London stock exchange, the retail volumes of trading, have pretty much doubled since the beginning of the year. Now back in February and March when there was a lot of worry about the possible war in Iraq retail investors were staying away but the latest figures that we’ve had suggest that they’ve certainly come back. LEWIS: Brian Tora from Gerrard thanks very much for talking to us. And if you have questions about investing or saving you can call our phone-in Money Box Live on Monday with my colleague Vincent Duggleby and Brian Tora will be one of the guests on Monday for our phone-in Money Box Live. The government announced this summer that there’s to be a new system to safeguard final salary company pensions for workers when their employer goes bust. At the moment they may get nothing but from 2005 schemes would have to be insured – guaranteeing the pensions that have been promised up to certain limits. Well it sounds good news but this new system will be based on an American model, and when our reporter Lesley Curwen went to the United States she discovered serious worries about the way it’s working CURWEN: I've come to the industrial heart of Maryland, to Baltimore, to talk to retired US workers whose pension scheme has been rescued. They used to work for the once- mighty steel producer, Bethlehem Steel. MAN: One time we were the largest employer in the State of Maryland. Who would have thought that Bethlehem Steel the number two or three steel maker in the United States – the big United States – could have possibly went bankrupt. If you’d talked about this ten of fifteen years ago guys would have laughed in your face. Not Bethlehem Steel as strong as we are - you know we could weather any storm. CURWEN: It didn't weather the storm. It became bankrupt two years ago. But retired furnace-worker Sam Batts, who you heard, is still getting a pension. He and 95 thousand other members of the Bethlehem Steel pension plan were bailed out by a body called the Pension Benefit Guaranty Corporation, or PBGC for short. It's a pension guarantee system which takes over the pension schemes of failed companies, and pays out some or all of promised pensions to people like Sam, up to a set limit. And that's the way the UK government wants our new system to work. But as I've discovered here in the US, there's a serious problem. The American scheme is deep in the red. The money in its coffers has plunged by 15 billion dollars in just a couple of years. It's so worrying, the powerful US government watchdog, the General Accounting Office, has declared it to be “at high risk”. I went to Washington to meet David Walker, the Comptroller General of the United States, who is the boss of the GAO. WALKER: The PBGC’s financial condition has deteriorated significantly in the last year and a half. They’ve gone from an approximate ten billion dollar accumulated surplus to in excess of a five billion dollar accumulated deficit and so we believe that there is a serious situation here that, while not an immediate crisis, does require fundamental reform. CURWEN: But why is the American pension guarantee scheme in such a poor state? Part of the trouble comes from steep falls in share investments in pension funds. But that's not all. Companies like Bethlehem Steel have paid far too little money into their pension schemes, and into the PBGC's coffers. Employers must pay 19 dollars a year for each worker, but if their pension scheme runs low on funds, they have to make extra payments to the PBGC. This is exactly how the UK government wants our new system to work. But quite simply, these top-up payments have failed. Many firms delayed making them, quite legally, by using technical loopholes. And when they went bust, they saddled the insurance fund with huge deficits. I asked Vince Snowbarger, Assistant Executive Director of the PBGC, is it true, that American firms can go on under-funding their pensions for years? SNOWBARGER: The simple answer to that is ‘yes’. And typically a company that’s in financial difficulty will take advantage of the minimum funding requirements. In other words they’ll put in as little as they can and as they continue to do that and get more and more financially weak they entered this death spiral. By the time they ultimately reach bankruptcy their funding level is at a point that costs a significant amount to the insurance system to the other employers who support the insurance system and to their workers. CURWEN: So if US companies get away with putting the bare legal minimum of money into their pension schemes, will the same happen in the UK? Here our minimum funding requirements for pensions are stricter, but the government's about to do away with those rules, to allow each scheme to set its own funding levels. Some fear that will be a dangerous move. And our government hasn't even decided how the new insurance scheme will measure funding. There's another issue - what if the worst happens? The US scheme is more than 5 billion dollars short. But it's identified a nightmare scenario of 35 billion dollars of potential losses, if a number of big companies were to go bust. Former Bethlehem Steel workers Len Shindel and Sam Batts fear their pension payments would be hit. SHINDEL/BATTS: Workers in the United States feel very vulnerable CURWEN: Does that mean you’re worried that the PBGC won’t carry on? SHINDEL/BATTS: Absolutely. We’re looking at the airline industry, we’re looking at the automotive industry, we have tremendous fears that other pension plans will fail and that then there will be an attempt to shift the burden onto the very workers who are collecting their PBGC pensions. That’s a major apprehension that we have. The manufacturing base of this State and other States is completely going under and all of it’s going to be on the backs of the PBGC and sooner or later PBGC is gonna be same condition that we’re in – bankruptcy. And then what does that mean for the workers? CURWEN: What indeed? There's no suggestion the pension guarantee system is anywhere near collapse at the moment. But if plans for reform don't work and a clutch of large companies go bankrupt, what then? Its funds are not officially backed by the US government. But would the state ride to the rescue of pension savings of 44 million Americans? I asked the Comptroller General of the United States, David Walker. WALKER: From a legal standpoint if that insurance agency went under then people could potentially suffer losses. Now I think from a practical standpoint, from a political standpoint, I think it’s highly unlikely that that would occur but all the more reason why it’s important to set up the system right, it’s important to try and minimise the possibility that that would ever occur, not only from the standpoint of workers and retirees but for tax payers. CURWEN: So the US taxpayer might have to pick up the bill if the pension guarantee system itself goes bust. In the UK, the government has said our new guarantee fund will have no state money to back it up. In the end, is the American system the right model for us to follow? I asked Thomas Healey, lecturer in public policy at Harvard University. HEALEY: In part it’s a good model in overall concept, sort of at a hundred thousand feet, but quite clearly down the details the PBGC needs some major improvement and hopefully the UK or any other country following that model of pension guarantee, that’s useful but getting the details right is both difficult and very important. CURWEN: Everyone I spoke to in Washington agrees the UK must proceed carefully with its pension guarantee system. And that includes the government - Peter Fisher is the Under-secretary for the US Treasury. FISHER: There are a great many improvements we think need to be made to our pension system and our pension guarantee system here in the United States. CURWEN: So would you say that essentially the plumbing of the American guarantee system has just not been good enough? FISHER: We’re disappointed with it. It has not produced the levels of funding we’d like to see and it’s to be regretted that our system did not better prepare us for that and avoid this outcome. That’s certainly what I would caution the United Kingdom as it pursues creating such a system to avoid the kind of outcome we now find ourself in. LEWIS: Peter Fisher of the US Treasury ending that report by Lesley Curwen. And that’s a subject we will no doubt be returning to. Well Money Box has reported before on the so called Guaranteed Equity Bonds that have left so many people with big losses. They promised high returns, 10% a year or more, and they paid them but without warning customers that they could lose much of their capital as a result. LloydsTSB tempted 50,000 people to invest in its Extra Income and Growth plan, they’ve all lost money and now the Financial Ombudsman says Lloyds is not paying them enough compensation. Louise remind us again of the background to this.. GREENWOOD: Well in January the Financial Ombudsman Service upheld a complaint from a Lloyds investor opening the door for thousands of similar cases. Since then Lloyds has been writing to some customers offering to reimburse them but now in an unprecedented development the Ombudsman has stepped in to warn people that if they take the Lloyds offer they could lose out substantially. This is because Lloyds is only offering to repay the initial investment plus interest at 3%, that’s based on what investors would have earned from one of the bank’s savings accounts. But where the complaint has been resolved through the Ombudsman’s Service the interest rate has been much higher, around 6%, based on what you’d have got from a high interest account. LEWIS: So what should people do? GREENWOOD: Well if you have an Extra Income and Growth plan and haven’t complained yet the advice is to do so. And if you’ve had an offer from Lloyds, you’d be well advised to ignore it or it could cost you hundreds of pounds. Lloyds is giving investors 30 days to make a decision and the Ombudsman says that if anyone accepts its offer and signs a full and final settlement there’s almost no chance that they’ll have their case reviewed. LEWIS: Thanks Louise. Well LloydsTSB refused to come on Money Box to talk about this dispute, that’s a good start to the new series isn’t it, but live now to Leeds and Kerry Nelson from Bates Investment Services. Kerry, what is Lloyds planning to do about this? NELSON: From the results that they announced on the 19th of July it’s very clear that they’re making some kind of provision, because they indicated as such that 300 million had been put by in the case of misselling in the bonds that we’re seeing at the moment. So I think it’s very clear that obviously they are making those provisions and from knowledge at the moment although official statements haven’t come out from either the Ombudsman or Lloyds there are discussions going on at the moment. LEWIS: And the Financial Services Authority is investigating it isn’t it? NELSON: Exactly I know at the moment that everything is un-official , nothing’s come out in black and white but LEWIS: No we certainly found a bit of a barrier when we tried to find anything out but you think that all the investors might get some compensation if that kind of deal is done. NELSON I think there’s clear indications from the provisions that something will come into place . LEWIS: Now over the summer many more of these schemes from other companies have matured. What sort of losses have investors suffered? NELSON: I think in general about two or three have matured since you have been off air and there are around about 50% losses. LEWIS: So they have lost half of the money they invested? NELSON: Fifty percent loss of the capital invested, Yes. LEWIS: Now the people who have lost this money, were they mis-sold these products or should they really have known the risks. What went on? NELSON: I think actually that’s too much of a general statement to make, and I think it’s very much down to individuals’ cases , as to whether they were mis-sold or not, and whether they understood what kind of bond that they were taking out and risks associated with it. LEWIS: But if people think that they were mis-lead in someway or it wasn’t all clearly explained to them what can they do? NELSON: They can actually in the first instance, write a letter of complaint to the company of which they took out the bond and where they received the advice from. LEWIS: And then, briefly NELSON: If they don’t get a satisfactory answer then they go to the Ombudsman who will then start to deal with the case . LEWIS: Kerry Nelson from Bates Investments Services, thanks for talking to us. And still with Lloyds, Louise, a bizarre but worrying story. GREENWOOD: Yes one of the bank’s financial advisors was jailed this week for nine years for stealing more than two million pounds from elderly and vulnerable customers and using the cash to buy the country’s largest private collection of parrots. Lee Gardner took the money over four years while working at the Lloyds branch at Seven Oaks in Kent but no-one at the bank noticed until he transferred a million pounds into his girlfriend’s account. LEWIS: Thanks Louise, and that’s all we have time for today and you can follow up all our stories on our website www.bbc.co.uk/moneybox, same address as ever but a new look for the new season, more features and easier to find your way around with a new search facility, or you can call the BBC Action Line free 0800 044 044. As I said, Money Box Live is back on Monday with Vincent Duggleby to answer your questions on saving and investing. Working Lunch has personal finance stories each weekday, that’s 12.30 BBC Two. I’m back here next weekend with Money Box , today the producer was Penny Haslam and I’m Paul Lewis. 1