Sainsbury's and M&S are plugging deficits in their retirement schemes by signing corporate property assets over to them. How much longer can such expensive plans be kept going?

Can black holes in final salary scheme pension funds be filled with property? Last week, Sainsbury and Marks & Spencer did just that. Sainsbury has committed £750m of its "unencumbered" property to its pension fund to close a shortfall in its fund of £1.2bn, while M&S announced a very similar deal: a property partnership with its £5bn pension fund, in place since January 2007, will run for 15 years longer than previously planned, until 2032.

The pensions advisory industry is jubilant. Their fees will keep rolling in because these are free assets that can be shoved into an ailing fund to keep it going. Much better to grab a bit of property off the sponsoring company than admit the pension fund is bust and cannot meet its commitments. PricewaterhouseCoopers says it is currently advising 33 "major UK employers" on the use of more than £5bn of non-cash funding in this way.

But there is a good deal of scepticism about whether the pension fund valuations are fair. Finance directors think most pension accounting is make-believe; the bulk of the pensions advisory industry has few kind words for the benchmarks used to devise deficit totals. And if a deficit is really the result of strict accounting standards that bear little relation to the long-term value of assets, then any game to get around the rules is perfectly reasonable.

While employees still banking on final salary pensions will cheer the development, shareholders should be wary. There is no such thing as free money, so the pensioners' gain is their loss. If the company goes bust, the pension gets the property and not them.

Of course, they are told M&S and Sainsbury are far from going bust and that Britain will go down the plughole before those retailers run into trouble. But the banks said that, and look how safe they turned out to be.

In the end, final salary schemes are too expensive. Years ago, companies and unions should have seen the problems coming and struck a deal to make them cheaper. Instead they watched while low interest rates, a flatlined stock market and increasing life expectancy tore them apart, leaving younger workers on the worst occupational pensions imaginable.

■ Interesting, isn't it, that in the week that former RBS investment banking boss Johnny Cameron is booted out of the City for good, another banking boss in the eye of the 2008 financial crisis is enjoying a renaissance?

Andy Hornby, the former boss of HBOS, will tomorrow announce storming profits figures at private-equity-owned Alliance Boots, where he was given a berth after his bank had to be rescued by Lloyds. But he shouldn't get too carried away. The long-term plan may be to return Alliance Boots to the stock market, but the big City investors who would support any float have serious doubts. Privately, many say they will never back another company with Hornby at the helm – however good a job he does while it is owned by its private equity masters.

New Labour's model of state action plus free markets is broken. To win people back, we need a story that starts with fairness

The race to become Labour's next leader is under way, and the challenge the party faces is daunting. To hear some talk, the inevitable failure of the Lib-Con coalition is so clear, its imminent collapse into unpopularity so evident, that all we need to do is recharge our batteries and find a more telegenic leader to win next time. But the truth is far from that simple.

Most obvious is just how catastrophic our defeat was. While neither the Conservatives nor the Lib Dems triumphed alone, large parts of England have little or no Labour representation, and our share of the vote in many regions was tiny. Records were broken on seats lost and swings suffered. An unfair electoral system and good results in Scotland gave us a lot of MPs, but can't disguise how badly we lost.

Even more serious is that we now lack a coherent story about why the country needs a Labour government. Our defeat had much deeper roots than the recession, tiredness in office or a brave leader unsuited to the modern media. Though our manifesto was better than the last election, it could not disguise a bigger political challenge. Our response must be every bit as fresh and radical as the changes that brought about New Labour, or we will certainly fail again next time.

New Labour had a set of assumptions about how political, economic and social change could happen – assumptions that had run their course well before the global recession hit. For 10 years, it worked pretty well: a liberal market economic policy produced growth and wealth that could be reinvested in public services or transferred to those on the lowest incomes. The state – powerful, centrally directed, technocratically managed but using market forces, too – was the instrument for both public-service reform and social change.

It produced some pretty impressive results. Millions of jobs were created, public services were rebuilt and family incomes improved for many. But all the time, the tools we were using for success were sowing the seeds of defeat. They were bound to become less and less effective.

Dependence on the financial sector was not only unsustainable; it created an economy that simply didn't offer much to too many people. It produced a labour market that, for millions, brought stagnating incomes, insecurity and reduced pension rights. The same labour market demanded mass immigration, which, in too many places, increased competition for jobs, housing and public services, in ways that, again, seemed unfair.

The genuine effort to tackle poverty created sharp fault lines that cut across the common sense of British fairness. Many could not see why they got little support for hard work, when others apparently received much more for less.

The deep conflict between our strategy and the fundamental fairness code of the British people was apparent before the global recession. In an odd way, the recession gave us a new boost: a clear focus on unprecedented challenges. It forced some of the changes – an interventionist industrial policy, investment in housing, effective use of public procurement – we will need in the future. But while we saved many people from going under, many families were exposed to the paucity of immediate support, which they compared angrily with the resources going to those who are not working.

To get things done, New Labour decided that an active state was synonymous with action by the state itself. Much was done; but we created little public engagement in, or ownership of, many of our best initiatives. No one ever fought for tax credits, or Sure Start, so that when the time came to defend them, we found people thought they were acts of God, not of mere elected politicians. And some of the market measures we encouraged to drive efficiency created, in turn, jobs with fewer rewards and lower levels of security.

We tried to engage with social rights and responsibilities, and the cultural issues that define cohesive communities. But we never made the health of civil society central to our vision of change, leaving many people feeling we had nothing to say on family values, decent behaviour, the responsibilities to work and obey the law, which are even more important to a heterogeneous and socially diverse society.

Don't think the other side don't know this. The Con-Lib coalition contains many people who understand our weakness. Their response – a smaller state, greater self-reliance and reducing the drive against poverty – will ultimately fail. They have nothing to say on the fundamental shape of the economy or economic fairness. Nonetheless, their approach will strike a chord and has more mileage than many think.

Labour's challenge is to address the same challenges from the centre-left. We need a dynamic economy, but one with greater fairness in the labour market and a far more serious engagement of developing new industries than we have dreamed of to date. The deficit means that our core model of change – through growth and wealth transfers – will not be available for years. A rethink of welfare demands a common-sense fairness that also delivers a wider need for security. A drive against inequality must recognise that not everything that makes us more equal is fair. We need a clear recognition that civil society, with clear responsibilities and rights, is essential rather than desirable for social change. And we need a Labour party that wants to be English as well as Scottish, Welsh and British.

And as a first step, there must be a willingness to accept that those who have swung away from us at this election have too little voice in today's Labour party, or even most unions. They have concerns that have been too readily dismissed; they will only come back to us when we have more to say to them. They won't come back just because the new coalition government becomes unpopular. Thatcher and Major let them down – but they didn't come back to us until we had changed.

The threat of retribution from the markets (Just what the City dreaded, 8 May) exposes a democratic deficit greater even than our unfair voting system. John Cridland, CBI deputy director general, warned "we are not in control of our destiny" as money markets and credit agencies prepare to pull the plug on our currency, interest rates and future investment. Previous Labour governments, Norman Lamont, Ireland and now Greece all know what this means, and it makes governments very afraid. New Labour appeased the City and was rewarded with gross financial irresponsibility and the worst financial crisis since the Great Depression.

However, the City is largely owned by the public through pension funds, insurance payments and savings. Every day we throw millions of pounds at fund managers, which they use to drive up asset prices, rake in bonuses and hold countries to ransom. This grand corruption is legal but immoral and also bad economics. We need a new model of economic democracy which ensures that the City is also accountable for long-term stability, not just short-term returns. It is deeply ironic that the City demands political stability from governments, when it creates ceaseless instability through the money markets. Fixing our broken political system is only the first step to creating a democracy capable of governing in a complex, interdependent and diverse world.

Titus Alexander

Convener, Democracy Matters Alliance

• David Cameron has constantly claimed that the country needed "firm, decisive dynamic leadership" which only the Tories of course could provide "to clear up the mess that Labour has left", implying that the budget deficit has been largely caused by wasteful government spending. Why does Labour even now not continually point out that the deficit is principally the result of preventing a banking collapse and stimulating growth in the economy to stop a slide into 1930s-type depression. The measures Gordon Brown took were quickly followed by most other industrialised countries, including the US. A recovery has begun, albeit a fragile one.

Brian Mairs

Bangor, Co Down

• The UK injected vast amounts of cash to prop up the banks. So we need to borrow from them to meet our everyday commitments. However, the banks consider that our indebtedness makes the UK a more risky creditor, meriting a higher interest rate to borrow back the money we originally loaned them. Call me cynical, but it looks like a shafting.

Andy Stubbings

Aberford, West Yorkshire

• Are the markets that we are told dislike uncertainty by any chance related to the markets that spent billions trading in securities they didn't understand?

Adrian Perry

Sheffield

• Telecoms company expected to report annual pre-tax profits of £1bn to £1.1bn
• Annual results likely to show that BT has lost 35,000 jobs in the past two years

BT is this week expected to announce that it has returned to the black, after recording its first loss for eight years in 2009, while disclosing that it has cut 5,000 more jobs than expected.

Concerns will remain about the £9bn hole in the telecoms company's pension fund as the regulator continues to investigate its proposal to support the largest private-sector pension plan in the UK.

The company is expected to report annual pre-tax profits of £1bn to £1.1bn, compared with the £134m loss in 2009 made as a result of the dramatic write-down in the value of its IT business, BT Global Services.

The IT unit made wildly overoptimistic projections about the profitability of more than a dozen of its biggest contracts – including its work for the NHS – resulting in a series of profit warnings and causing BT to more than halve its dividend as it was forced into a cash squeeze.

Ian Livingston, BT's chief executive, is also expected to announce alongside the results on Thursday that the company has lost 35,000 jobs over the past two years. BT had originally pledged to make 15,000 redundancies in the year to end April, the same number as the previous year. In total, however, the company is understood to have cut 5,000 more jobs than the City had expected. BT declined to comment.

The company, the UK's ninth largest employer, has been slashing contractors' pay and bringing more jobs in-house to try to reduce costs, and many of the job losses are understood to have been among temporary or agency workers. BT has also been offering staff a series of what it terms "time-out options", including the opportunity to take up to a year off work in return for a 75% pay cut.

The cost-cutting has come as BT tries to get to grips with continued decline in its core residential and business telephony markets, as well as the implosion of BT Global Services, which it had hoped would be an engine for future growth. Since the problems at the unit were uncovered in October 2008, when BT's shares plunged to their lowest level since the firm was privatised by the government of Margaret Thatcher, its senior management team has been replaced and the workforce slashed.

Earlier in the year Hanif Lalani, BT's former finance director who was parachuted in to Global Services to clean up the mess, was replaced by Jeff Kelly, a US citizen with almost 25 years of IT services experience at the technology services firm EDS. Kelly has been given a remit to try to put the company back on a path to growth.

The Global Services fiasco hit at a dire time for BT, which was wrestling with the deficit faced by its pension scheme. In May last year, BT announced plans to pump £525m a year over three years into the scheme. The plan was approved by the scheme's trustees.

But then in February, as BT revealed the results of its triennial funding valuation for the scheme, which showed it was £9bn in the red, the pensions regulator shocked the City by announcing that it had "substantial concerns" with that plan. Neither BT nor the regulator would elaborate.

Pension experts, however, said that the dispute centred on an agreement to extend the company's deficit payments from 10 to 17 years. They pointed out that the regulator would be under pressure to fight BT in order to prevent copycat deals by Britain's 7,000 other final salary schemes, most of which are in deficit.

BT is still waiting for the regulator's final decision but is confident that it will not have to increase its payments into the fund for the current three-year period.

On Thursday, BT will announce the latest IAS19 figures for the fund, which provide an accounting snapshot of the fund at the end of April but have no bearing on the actual cash that must be put into it. The IAS19 estimate is expected to show that the fund is still very firmly in the red.

A pensions crunch is looming but none of the political parties have plans to redress the damage to occupational pensions

Back in the autumn of 2008 I wrote in this column of the risks that the credit crisis could spread from the banks to sovereign nations.

What worried me then were indications from the market in sovereign credit default swaps – insurance against governments reneging on their loans – that the creditworthiness of some nations, including Greece, Portugal and Spain, was under strain and that the single European currency could be at risk of disintegrating.

"Politicians within the eurozone," I concluded, "need to face the reality that larger, richer countries will need to help their smaller brethren...or the single currency could be jeopardised."

So it has turned out: a reluctant German populace has to bail out the Greeks. Gordon Brown may have failed to convince voters in last week's leaders' debate, but they should be thankful to him for one thing at least: we are not members of the single currency zone so we have exchange rate and interest rate flexibility, as well as remaining out of the front line of the Greek bailout.

Despite the dark hints muttered by David Cameron, the UK's situation is a long way from that of Greece. We still have a triple A credit rating and there seems little imminent danger of a downgrade. Our debt has a longer maturity than other G7 countries, at about 14 years compared with 7 years for Greek borrowing. A much lower proportion of our gilts – government IOUs – are held overseas, about 30% or so, and our credibility on managing the public finances is far stronger. Despite election uncertainty, we have a pretty stable political system by international standards. Greece was run by a military junta as recently as 1967 to 1974, while the UK has a centuries-long parliamentary democracy. Whoever takes power after the election, Britain is not yet about to be run by out-and-out nutters.

That doesn't mean we don't have a problem with the size of our deficit: we do, and it was disappointing, if predictable, that the leaders' debate did so little to advance a sensible discussion.

Getting the deficit under control is hugely important, less because of the fear of a credit downgrade than because we need to build up a new buffer to give us the ability to deal with a future meltdown.

Even if the financial sector is brought into order, the next crisis is already building and it is in pensions and the ageing population.

As Alex Brummer expounds in his new book The Great Pensions Robbery Brown's 1997 removal of dividend tax credits turned the UK's solid final salary provision into a basket case and reduced incentives to invest in the British stock market. The damage to occupational pensions will make the burden on the taxpayer even more onerous: a pensions crunch is following hard on the heels of the credit crunch, but none of the leaders addressed this.

Whoever, or whichever combination of parties win control after the election should have three over-riding priorities: cutting back the deficit, taming the banks and finding a route to sustainable growth.

None of the trio convincingly addressed the question of how the UK will grow its economy in future. There needs to be concerted action on manufacturing, and a cognisance of the fact that we are no longer an economic superpower.

The emerging superpowers are China and India, and the countries that have fared relatively well in the crunch are those with something to sell to them. Given that we don't have the natural resources bounty of Canada, Australia or Russia, and we can't fall back solely on financial services, it's not easy to envisage how we might achieve that.

On the banks, Labour's unwillingness to countenance structural reform – some kind of separation of utility banking from casino operations – is frightening.

So, however, were the intimations from David Cameron that the old Conservative instincts are kicking in. Cutting the deficit will be painful whoever does it, but the exercise still needs to be carried out judiciously, and with compassion.

Cameron's defence of plans to raise the inheritance tax threshold to £1m as recognising the natural human instinct to pass one's home to one's children is ludicrous: a tiny 0.6% of all property transactions are for more than a million. This is a measure to benefit the rich.

His attack on benefit claimants and his visceral zeal for downsizing the state suggests there is not much in the way of understanding the plight of the poorer regions.

Parts of Wales, Scotland, Northern Ireland and the north are virtual government dependencies. That's not desirable, but it's the way it is, and brutal removal of support will just create more devastation.

A couple of years ago Cameron was forced to distance himself from a report by the Tories' favourite thinktank, Policy Exchange, which said the north should be written off. But a government in London cannot cut off the recipient regions, any more than the Germans can wash their hands of the weaker states in the eurozone. Handled incorrectly, the measures taken to bring down the deficit could threaten social order – and then David Cameron would be right in seeing a similarity with Greece.