Financial Review 4th July 2014

Pension managers underperform
Ninety-nine per cent of fund managers fail to beat the stock market, according to a 10-year study by the Pensions Institute at Cass Business School, part of City University London. It found that actively managed funds returned an average of 1.4% less than the market each year between 1998 and 2008, once fees were taken into consideration.

The Institute examined the monthly returns of 516 funds focused on British shares. According to Professor David Blake, the director of the Pensions Institute, just 1% of fund managers are stars who are able to generate superior performance in excess of operating and trading costs, but they extract all of this for themselves via fees, leaving nothing for investors.

“A typical investor would be 1.4% a year better off by switching to a low-cost passive UK equity tracker,” he said. Tracker funds automatically buy the holdings in a particular stock market index to mimic its performance.

Help to buy scheme under attack
The Government has yet to prove that its flagship Help to Buy mortgage guarantee policy is providing value for money, an influential committee of MPs has found. The House of Commons Public Accounts Committee (PAC) has warned the scheme has created a “medium and long-term risk” to the taxpayer in the shape of a £10 billion portfolio of loans that will impose a heavy administrative burden for decades to come.

The Help to Buy scheme, launched last October, sees the Government provide equity loans to help mortgage borrowers finance up to 20% of the purchase price of properties worth up to £600,000. The PAC says taxpayers face decades of administering the debts associated with the scheme. This criticism followed a warning from the International Monetary Fund that recommended the Government consider scrapping the scheme if house prices continued to accelerate.

Food bills fall
Food bills fell in May for the first time in eight years. According to the Office for National Statistics (ONS), grocery prices were 0.6% lower in May than 12 months before, as overall inflation fell to its lowest level in nearly five years. The first annual drop in food bills since March 2006 shows supermarket price wars are cutting costs at the checkout. The ONS said the Consumer Price Index measure of inflation fell sharply, with prices of all consumer goods rising just 1.5% in the year to May, the lowest inflation level since October 2009 and well below the Government’s 2% target.

Millions hit by HMRC tax errors
Millions of people are being hit with extra tax demands as officials attempt to claw back under-payments. This is despite £300m of reforms that were meant to reduce errors. HMRC says 5.3m people paid the wrong amount in 2013-14, including 3.5m who paid too little and will have to make extra contributions in future years. Those who paid too much tax will be able to claim refunds.

HMRC has started writing to those affected by the errors, which average £300 per person. Despite reforms to improve the accuracy of the pay-as-you-earn system the number of people affected by errors increased in 2013-14 from 5.2m the previous year.

Consumers are more confident
Confidence among consumers has reached a new high as big falls in energy bills and car fuel costs ease the pressure on household expenditure, according to a survey.

The Lloyds Bank Spending Power Report for May showed a reading of 146 points for consumer confidence, the highest since the survey began in November 2010, continuing the trend of improved sentiment since early 2013. The survey said confidence was helped by limited growth in spending on essentials – only around 0.5% higher than a year ago – which eased the pressure on household budgets. Lloyds said this was driven by the recent stability of energy prices, with warm weather likely to have helped lower demand, and by further sharp falls in fuel spending, with petrol prices around 6% lower than at the same time last year.

Costly snacks
Workers spend the equivalent of the cost of a luxury holiday on small purchases such as coffees and snacks, claims new research. People who travel to work pay out up to £2,500 a year on items such as lunch and hot drinks – around £10.59 a day on average. Over the course of a year, once weekends and holidays are excluded, the bill climbs to £2,541. This means well over £3,000 in pre-tax earnings is frittered away, yet consumers do not factor it in to their everyday budgets.

Celebrities count cost of tax avoidance
Celebrity tax scheme promoters have failed to stop the HMRC forcing their clients to pay their bills up front. In response experts predict a wave of high-profile bankruptcies. MPs sitting on the Finance Bill committee last week approved a plan to force investors in tax avoidance schemes to pay disputed bills immediately. Traditionally rich individuals can claim tax reliefs up front and may have to pay bills only years later after the schemes have been defeated in the courts. Aidan James, a tax scheme promoter who put 60 clients into a tax avoidance scheme involving second-hand cars that was used by DJ Chris Moyles, sought unsuccessfully to block this.

Experts at claims firm Rebus, which is bringing claims against financial advisers on behalf of aggrieved investors in tax schemes, estimate hundreds could be bankrupted by the payment demands.

One day a week NHS Trust boss milks it
An NHS trust chairman has been given an annual package worth almost £200,000 to work as little as one day a week. This has been criticised by patients’ groups, while nurses accused the NHS of indefensible behaviour after authorities awarded the deal that allows the administrator to claim up to £17,000 a year in expenses without a single receipt. The package is thought to be the most the NHS has ever paid for a trust chairman – a role that usually involves one or two days’ work each week. It’s also the first time health service authorities have been found routinely authorising claims for expenses without any evidence about what has been spent.

Christopher Langley was appointed chairman of Medway Foundation Trust in Kent in February after his predecessor resigned. His predecessor was paid £40,000 to £45,000, the typical rate for foundation trust chairmen. Mr Langley is paid through a service company, despite attempts by government ministers to end this practice. His company is paid £14,400 a month, including VAT, plus an extra 10% each month to cover unnamed out of pocket expenses.

Tax system hits MSBs
Growth ambitions of medium-sized businesses are being curtailed by the UK’s onerous tax regime, which favours small and large companies, according to the Confederation of British Industry (CBI). It claims the current UK tax system disrupts cash flow, absorbs management time and dampens export ambitions of medium-sized businesses (MSBs).

The Stuck In The Middle research found many MSBs were discouraged from growing profits beyond £1.5m, as more profitable firms are forced to pay corporation tax quarterly instead of annually, which negatively impacts cash flow. The CBI says it wants the threshold for quarterly tax payments raised to £5m.

Have a degree on us
European students who took out taxpayer-funded loans to study at English universities are defaulting on nearly £40m of repayments. More than one in eight students from EU Member States are failing to keep up with repayments after finishing their courses and leaving the UK. The amount owed by defaulting students has tripled in just two years, from £12.7 to £38.2m. The figures from the Student Loans Company will renew concerns that British taxpayers will end up footing the bill for unpaid loans as EU students return home and disappear from the system.

The amount lent to EU students, including those who are currently studying, has rocketed by more than £200m in a year to £686.3m. Since 2006, students from EU Member States have been eligible for the same special low-interest Government-backed loans as home students. Graduates based in Britain have their loan repayments automatically deducted from their pay but there is no equivalent mechanism for those that move abroad. Officials insist EU students will be pursued through the courts in their own countries, but 49,100 EU citizens have become liable to start repaying loans since 2006 and only 2,000 are doing so.

Current account comparison on the way
Customers will soon be able to compare current accounts to see if they are getting a good deal from their bank. The Government has agreed how the service will work with the UK’s biggest banks and said it would be up and running by the end of the financial year next March. Customers will be able to download a year’s worth of current account data in a single file that can be read by online comparison websites. The information will be stripped of any personal details to make it more secure.

Consumer campaigners have complained that bank accounts are too complicated and difficult to compare, particularly when it comes to overdraft charges or interest for those in credit.

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