Examination ofWitnesses (Question Numbers
560-568)
MR STEPHEN
TIMMS MP, ANGELA
EAGLE MP AND
IAN PEARSON
MP
26 NOVEMBER 2008
Q560 Sir Peter Viggers: As we leave
ports I think we all recognise, Ministers, that you have not come
here this morning authorised to say that there will be a change
in this situation, but we as a Committee tasked to scrutinise
the Treasury's functions feel strongly that something should be
done. I move on to the Debt Management Office. The Debt Management
Office employed about 80 people before the present dramatic expansion
in borrowing. There is some discussion about DMO being given further
resources. Can you comment on that please?
Ian Pearson: Firstly, I would
want to say that the DMO people are doing a terrific job at the
moment. They are certainly working hard under the current circumstances
and, as you will be aware from when Nick Macpherson came and spoke
to the Committee, Nick assured you that he is in regular meetings
with the Head of the Debt Management Office and if they needed
further resources those resources would be made available, and
that remains the position.
Q561 Sir Peter Viggers: An auction
of gilts in July 2008 was only 1.1 times oversubscribed, which
was a pretty poor result really. How confident are you that the
DMO will be able to fund the enormous amount that you are calling
upon it to try to obtain?
Ian Pearson: Government assets
are in strong demand both globally and in the United Kingdom and
they do represent the preferred risk-free asset for major international
investors and we have no reason to believe that that is not going
to continue to be the case. When you look at the wider environment
at the moment with falling interest rates and falling inflation
as well, I think there is going to be a continuing strong demand
for gilts in the future. You rightly highlight one of the auctions
where there was not as high coverage as normal with regard to
gilts, but if you actually look at the coverage rates so far this
year they are slightly up on last year despite the fact that we
have had bigger issuance as well, so I remain very confident that
there is every reason why international and institutional investors
will want to invest in UK gilts in the future.
Q562 Sir Peter Viggers: But sterling
has fallen considerably and the market which values creditability
through credit default swaps values the United Kingdom less well
than some UK companies. It costs more to insure the Government's
creditability than some UK companies.
Ian Pearson: I think there is
a bit of rubbish being spoken by your leader of the Opposition
on CDS and UK gilts. The simple fact of the matter is that CDS
spreads, when it comes to sovereign debts, is pretty much an illiquid
market at the moment. The fact is we have had two issues that
have not been covered within the last 10 years when it comes to
UK gilts. They do remain highly popular and I have got every confidence
in the officials in the Debt Management Office to be able to continue
to raise the funds that will be required in the future.
Q563 Sir Peter Viggers: Giving evidence
to us the Debt Management Office said: "If there is an uncovered
auction we have processes in place to deal with that." What
are the processes?
Ian Pearson: A lot of processes
relate to the fact that these issues will be taken up rather than
through auction by other arrangements in the relatively unlikely
event that a gilt auction is not fully covered. As I say, we have
no reason to expect that future auctions will not be fully covered.
We can never guarantee when we are talking about the sort of sums
that we are here that there will not be a case in the future where
there are problems with a particular auction, but I think there
is every reason for the Committee to be confident that we have
a very effective gilt-raising operation in the United Kingdom.
Q564 Sir Peter Viggers: But the amount
of prospective borrowing since the Budget has almost trebled.
Do you expect the price of gilts to increase and have you factored
a higher price into your calculations?
Ian Pearson: I do not want to
speculate on details of prices. Those will be determined in the
normal way as part of the issuance process. In terms of the fact
that we are going to need to raise more money through gilts, that
is absolutely right. In actual fact, about two-thirds of the extra
money that we need to raise currently is as a result of the bank
recapitalisation programme and Bradford & Bingley and what
we are doing with regards to the Financial Services Compensation
Scheme to compensate people who have retail deposits in the Icelandic
banks. That has required a significant additional level of activity
on the part of the Debt Management Office. They have already significantly
upped the amount of issuances so far this year. They have got
a pretty significant forward programme for the rest of this current
financial year, but, again, I have got every confidence in their
ability to do that job and to raise the funds that we require.
Q565 Sir Peter Viggers: Some commentators
have said that it is rather surprising that long-dated gilts are
not offered more than they currently are. Can you comment on that?
Ian Pearson: We do offer long-dated
gilts and obviously there is always an issue about the balance
between short, medium and long term in terms of the offerings
that we make. Certainly there is a significant market appetite
at the moment for short-term gilts. We have also got a short-term
requirement in the sense that some of the things that we want
to do to raise funds have their timescale over the next two or
three years, and we think it right that we should be matching
the market appetite with our own requirements as a government
for short-term finance, so I think the overall balance at the
moment in terms of what we are proposing to do is the right one.
We continue as a matter of course to consult and work closely
with the markets about our forward programme so there should be
no alarms and surprises when it comes to future issuances as well.
Q566 Sir Peter Viggers: You were
planning to increase VAT by 1% and your tax ready reckoner helpfully
points out that this would have raised £5,000 million in
2011-12. How are you going to fill the black hole if you are not
going to do that?
Mr Timms: There is not a black
hole. I think you will have gathered from the coverage since yesterday
that we looked at a series of options in the lead-up to the Pre-Budget
Report, as everybody would expect. There was an exercise looking
at that particular option and that was rejected. In its place
the fair way forward was determined to be the one that was announced
by the Chancellor yesterday. The revenue that would have been
raised by that measure is instead being raised by the announcement
that the Chancellor made in the PBR.
Chairman: The final area we want to look
at this morning is the Government Actuary's Department. Nick Ainger?
Q567 Nick Ainger: Ian, could I ask
you about the Mineworkers' Pension Scheme. We asked the Government
Actuary when he was here these same questions. There was an article
by John Ralfe in the FT in July in which he claimed that
there was a major problem arising in the future because of the
way that the surpluses were being calculated by the Government
Actuary. Mr Ralfe said in his article that these surpluses were
fictitious and he went on to say that: "This is because the
method of actuarial valuation, set down by the Government Actuary,
understates liabilities by discounting at the expected return
on assets, including 70% equities, not the index-linked gilt rate
which would better reflect the fact that pensions are inflation
linked and government guaranteed." He went on to say: "On
an index-linked gilt basis, there was a £0.9 billion deficit
at market values at the 2005-06 valuations, not the reported £1.9
billion surplus. In 2002-02 the deficit would have been a whopping
£5.3 billion at market values, rather than the reported £0.7
billion deficit." To be fair to the Government Actuary, he
had only recently taken up his post and really was not in a position
to give us any detailed response, but if Mr Ralfe is right that
we should be calculating the surpluses using the gilt rate, are
we not building up a major problem in this pension fund because
it is guaranteed by the taxpayer that in the future, if Mr Ralfe
is right, then the taxpayer is going to have to be pumping money
into the pension fund rather than taking, as it does at the moment,
50% of the surpluses?
Ian Pearson: I am not aware of
the particular article, but from what you are saying there it
strikes me that there is clearly an issue about how you undertake
valuations of pension funds and whether you base the valuation
on the assets receiving the return that index-linked gilts would
do or whether they receive some other sorts of returns that relate
to the fact that they might have equity as part of their portfolio.
I think the best thing that I can say in response to you is let
me take the issue away and either the Government Actuary or I
will write to the Committee and directly address the questions
that you have raised.[8]
Q568 Chairman: Anybody else? I think
that you owe us a series of notes as a result of this morning
because we have covered quite a range of topics. We will continue
to press on the issue of ports re-evaluation. I hope you will
continue to work with the Ports Minister on how the port operators
might be persuaded to pass back some of the very considerable
savings that they have made. I hope you will keep us updated on
that work as it proceeds.
Mr Timms: We are happy to do so.
Chairman: In the meantime I thank all
three of you for your attendance this morning.
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