The Penrose Perspective

Mandate, Hogarth & Penrose integrate into new single company called MHP

2010-09-29T17:14:00.002+01:00

Engine, the UK’s largest independent communications business, announces the integration of three of its public relations businesses, Mandate, Hogarth and Penrose, into a new single company, MHP Communications.

MHP has 160 employees and annual revenues of £17m.

Gay Collins, former Chief Executive of Penrose, becomes Executive Chairman of MHP. Sacha Deshmukh, former Chief Executive of Mandate becomes Chief Executive Officer of MHP. Andrew Jaques, former Chief Executive of Hogarth becomes Chief Executive of MHP Financial & Investor Communications.

Announcing the new company, Gay Collins said:

"This move creates a major force in the world of communications, where scale and scope is becoming an increasingly important factor in the buying decisions of clients. MHP has been structured to take forward the heritage of Mandate, Hogarth and Penrose within a model that we believe will deliver even more for our current clients as well as future clients and our people. We are excited about taking MHP from three successful businesses to an organisation that will make a measurable difference to the communications landscape."

Sacha Deshmukh said:

“MHP combines in-depth knowledge of the full range of audiences that matter to businesses and brands. From investors to consumers, from politicians to employees, from pressure groups to business partners, MHP understands those audiences and how to reach them.

A team of 160 and annual revenues of £17m makes us one of the strongest and largest companies in the PR market. But our goal is not size. It is to provide a unique quality and way of working with our clients. That is why we have designed MHP to work in a very different way from what we think is the tired, standard PR company model. We ensure the client is the absolute centre of our focus by organising our business and revenue around client sector, not PR discipline silo. It means that our only interest is in delivering exactly the right mix of expertise and brains for every single clients’ needs. MHP is designed to avoid the problem that plagues old-model PR companies where time, energy and focus is wasted fighting internal battles to protect internal cost centres.”

Andrew Jaques said:

“MHP will be significantly growing its City and financial team as we expand to meet our ambition to sit in the premier league in the financial and investor communications market. We will build from the many strengths of Hogarth, but also diversify our sector experience and attract new clients and more great people to the MHP business.”

MHP also announces that Sir Brian Bender, who until 2009 was the Permanent Secretary of the UK Department for Business, Innovation & Skills, is joining its Board of Directors, as a Non-Executive Director.

All former Mandate, Hogarth and Penrose consultants are transferring to MHP and the company plans for further expansion in staff numbers fuelled by continuing impressive growth. As part of its launch, MHP also announces the opening of its new Brussels office. The company will be announcing its Brussels leadership team late in the autumn and MHP Brussels will be fully operational from 1 January 2011.

In November 2010 MHP will be moving into a new custom-designed London office, currently under construction. The MHP London HQ will occupy a whole floor of MHP’s parent group Engine’s building in London’s Oxford Circus. The former Mandate offices in Edinburgh and Washington DC now become MHP offices. MHP also has a project team developing implantation plans to open MHP offices in other key global markets in 2011, with the initial focus being in Asia.

Hold the Front Page - "Consumers should Budget"!

2010-09-24T17:08:00.001+01:00

Of late there appears to have been an absolute deluge of programmes on ITV and the BBC about the credit crunch and the consumer. The latest one to pique my attention was a series on BBC2 consisting of a multitude of experts urging consumers to "read small print" and "be careful to budget".

While it would be easy to mock BBC2 and its hordes of well-meaning presenters, for stating, as my dear father would put it, “the bleeding obvious”, it did strike a chord with me. People were literally hanging off his every word in a way comparable to how I would image the crowd looked at Jesus when he made his speech on the Mount.

And that’s when it hit me. Back in the day people were taught “few things worth having are easy to get” yet this now appears to have been replaced by “if it is worth having it should be easy to get and someone else should do the thinking for me”.

And this is where I have to say I get quite cross. I can honestly say I am truly fed of people filling my screen who want sympathy for failing to engage their brain.

“Oh I took out a £200,000 loan and I only earn £20,000.” Well, I hate to say it but that is your problem.

“Oh a broker told me to do it and then the bank said it was a good idea.” Great, so if the broker told you to sell your granny and the bank recommended opening up a brothel in the driveway on the grounds of it being a good “business opportunity”, would you do it?

A year ago I was looking to buy a house when a mortgage broker told me pretty much the same thing. He even recommended taking out a residential property on a buy-to-let purchase, suggesting there were institutions which would be prepared to offer me five times my salary with a "bit of wangling". Guess what I said? Thanks but no thanks. I knew I couldn’t afford it and it didn’t matter what that guy said.

Now there is a current argument that consumers “don’t know”, are “unaware” of financial matters and should be “taught” the basics. I can accept this as, indeed, the general public do appear to misunderstand basic financial concepts but since when did common sense have to be taught? As the FSA has been saying for years, if it seems too good to be true, it probably is.
I am not asking for calculations similar to those enacted by PhD students from Cambridge. I am not asking for great thoughts similar to Einstein when he discovered E=MC2. I am not even requesting a "Eureka" moment from the public at large in the style of Archimedes. I am merely asking people snap back to reality and start understanding that just wanting something does not mean you should have it and education can only go so far.

Responsibility for oneself and for one’s actions can not be taught in schools and ultimately there has to be an end to this situation where people are always allowed to blame anything and anyone except themselves for their own predicament. And get compensation and rosy TV footage as we are encouraged to lambast banks, the prime minister, the cat and Mrs Higgins at No 43 in the process.

England did not cover itself in glory during this year's World Cup but the general population remained unmoved as they had been engaged in another sport, that of navel gazing for a fair while.

And if there is one thing I hope the credit crunch ends, it is this.

SI

You've done your A levels, now for your owe levels

2010-09-24T14:43:00.000+01:00

The long term future of pensions and saving in general is looking bleak as new generations of newly qualified graduates try and enter the job market saddled with debt, with no hope of being in credit for many years.

As more and more students are encouraged to go to university after school as GCSE passes improve year on year (23 years and counting), the banks must be rubbing their hands with glee at the prospect of a new generation of long term debtors customers. What chance have those students departing university got of paying off their student debt, made up over three or four years of fees, loans, credit cards, student union bar tabs, in the short term?

Research in an annual survey by university guide Push suggests average debt is projected to rise to £25,000 for those starting university this year. Add to that the Coalition signalling the fact that tuition fees will potentially almost double and a possible progressive loans system put in place, many young people will leave full time education massively in hock. What way is that to start their fledgling careers?

For those living in the South East, life for graduates could be even tougher. Apart from the cost of living compared to other parts of the country, most 20-30 year olds will be looking to get on the property ladder before they are able to instigate their long term savings and investment plans, such as pensions and ISAs etc. Every Englishman's house is his castle and we Brits see bricks and mortar as our favoured long term investment, yet many first time buyers face a hefty initial deposit. Where are they going to get this money? Borrow off their folks or join forces with friends to purchase are hardly examples of being in the full throes of adult independence. Would-be homeowners are facing an uphill struggle to get on the housing ladder and all the early indications are that it’s not going to get any easier – despite lenders seemingly trying harder to ease the pain. However, many of the recent mortgage rate reductions have been aimed towards borrowers with a 20% plus deposit, with mortgage products for first time buyers still not available from some high street lenders.

According to the National Housing Federation, the average 21-year old today will have to wait until they reach middle age before they can buy their first home. Those aiming to buy in London are warned that they will have to save up until they’re 52 years old to afford a mortgage.
Therefore as first time buyers are pushed into middle age before achieving a suitable deposit on a house, their ability to save for their retirement is massively shortened. This in turn will put extra pressure on the state pension system and why we will all be forced to work longer as the retirement age creeps up. Increased longevity and a lengthy retirement is not a lip-smacking prospect when you cannot afford to live through it. Experts advise us that pensions are the most tax efficient way of saving, but with no access to these funds and a credit easy environment of live-for-today-and-to-hell-with-tomorrow, people need to be educated to see the value of saving for their future. So, if you want a higher income in retirement than you get from your State Pension, you need another source of income as well. It’s never too early to start saving for your retirement, but in all probabilities many graduates will defer starting their pensions saving.
So, what can be done to help these impoverished ex-students as they start their working lives manacled to their banks? Well, for a start begin the process of financial education in secondary schools to begin the process of helping them with their money matters. This could continue into their tertiary education and actually point out the amounts of potential debt that can be incurred by pursuing further education, advice on how they can manage their debts, the benefits of savings and investments, provide guidance on the help they can get from the likes of financial advisers and financial websites.

In the meantime, we all look forward to the onset of auto enrolment into NEST, the government-led default pension scheme into which all employees will be auto enrolled starting from 2012, which will go some way to getting millions started into the savings habit, and in particular saving for their retirement. But does the average graduate even know about NEST and its benefits, let alone what an annuity is ...?

JA

NEST is best. Or is it?

2010-09-09T11:13:00.001+01:00

As plans to introduce auto enrolment through the National Employment Savings Trust (NEST) continue to be considered, there are signs of growing polarisation of opinion over the benefits of such a scheme, as highlighted between Pauline Skypala's article in the FT this week ("Why proceeding with Nest is crucial") and Penrose's recent annual survey on the future of the investment industry.

Next month, the Government will announce its conclusions following a consultation period on NEST and whilst bodies such as the NAPF and Association of British Insurers see potential benefits, notably its provision of a low-cost scheme for those on middle-low incomes, the Penrose survey (targeting senior investment and pensions industry figures) suggests that the vehicle simply does not make adequate provisions in terms of savings for its members. The Conservatives have argued that the scheme is superfluous, as suitable infrastructure to deliver pensions to the target group already exists. Interestingly, just 1.9% of survey respondents saw NEST as being affordable and practical.

Although it is generally accepted that auto-enrolment may be adjusted, but not discarded completely, there are growing concerns among its advocates that such amendments could ultimately lead to its demise. One possible solution is to effectively privatise NEST, whereby existing schemes would expand to enrol all employees, without the intervention of the Government.

The main stumbling block lies with the target audience that NEST seeks to help. Many low-middle income households don't see pension saving as a financial priority, or simply can't afford to contribute a sufficient amount towards a pension in order to make it worthwhile. The result of lower contributions ultimately leads to higher costs for providers, limiting the viability of privatising the scheme.

Assuming that Nest does go ahead, however, it will at the very least raise awareness of an increased need to save towards retirement. But as it stands, NEST is still an initiative that brings as many, if not more, pessimists than it does proponents.

JM

Shareholding all the cards

2010-08-27T10:52:00.001+01:00

The SEC's vote this week to change the rules on shareholder influence in US boardrooms has predictably ruffled corporate feathers.

While SEC Chairman Mary Schapiro sees the move, which allows shareholders with a 3% plus holding in a listed company to nominate board members, as "a matter of fairness and accountability", business lobbyists are far from convinced. "A giant step backwards for average investors", reckons David Hirschmann of the US Chamber of Commerce. “So fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny,” argues Kathleen L Casey, one of the two Republican Commissioners who opposed the change.

Paul Atkins, in the Wall Street Journal, warns the new rule would "increase the clout of special-interest groups at the expense of the vast majority of shareholders", and business leaders have vowed to fight on against the changes. On the wider principle of regulatory oversight of board behavior, there is still intense debate as to whether bosses' pay is any of the government's business.

But given what's happened in the last couple of years, it's hardly surprising shareholders are looking to flex their muscles. In a survey of senior investment and pensions figures published earlier this week by Penrose, two thirds of respondents anticipated growing shareholder presure on fund managers to boost levels of engagement with corporates.

Whatever your view on government "interference" in corporate governance standards, few would deny the behaviour of business directors falls within the remit of business owners. And since even the biggest institutional investors couldn't possibly hope to keep tabs on governance at every company they invest in, there would seem to be only two alternatives. Cross your fingers and rely on the good faith of directors (seriously?). Or take an active approach to engagement within a reasonable and proportionate regulatory framework.

AF

The Age of Austerity?

2010-08-19T16:33:00.002+01:00

Yesterday, for the first time since 1986, the opening day of an Oval test match did not sell out. This could be down to the pusillanimous performance of the touring Pakistan team in the preceding matches, or maybe the looming crisis facing English cricket. But seen alongside a range of other recent developments, it might be perceived as an indication that we are entering what the boss of Asda this week rather gloomily termed an "Age of austerity".

The debate about how best to approach this daunting prospect continues to rage. Lord Skidelsky and Michael Kennedy, writing in the Financial Times recently, invoked Keynes' argument that “the boom, not the slump, is the right time for austerity at the Treasury”, and concluded that "austerity in the capital budget is the worst possible remedy for a slump".

But, as P-Solve CIO, Glyn Jones, pointed out in this week's Financial News, the snag with this argument is that austerity measures weren't applied during the boom years. Furthermore, are we really looking at meaningful austerity measures anyway? The outgoing Labour administration's final forecast was that the value of all UK gilts in issuance over the next five years would rise by another £567 billion, whereas the new coalition government forecasts this figure will now be "a mere £454 billion. And we are told this is austerity." In fact, he continues, it's unlikely that any government will have the nerve to impose anything resembling real austerity, because of the harmful impact on the electorate. More likely, inflation will come to be seen as the best way to write off colossal debt levels. As Mr Jones concludes, "outright default is unlikely for most countries, but inflation is not. It is simply the easiest way to share the pain of removing excessive debt."

AF

Financing the Frontiers

2010-08-17T14:44:00.001+01:00

The recent news that China has become the second biggest economy by GDP may be unsurprising, but to dismiss this jump as nothing more than a nominal milestone would be remiss. Whilst changes to GDP league tables may have little or no impact on China's foreign policy towards the West, its growing economic clout will likely lead to increased efforts to court emerging economies.

China's investment in Africa is growing at an unprecedented rate (at present there are an estimated 800 Chinese companies working in at least 12 African nations) and criticisms around China's approach abound. China is widely accused of giving with one hand and taking with the other; building stadia, mines, roads and refineries and in return bleeding the continent dry of its natural resources. To dismiss China's intentions as little more than a grab for Africa's mineral wealth however, overlooks the complexity of the relationship and more importantly underestimates the contribution China makes to shaping young nations.

The World Bank and the IMF may offer financing but China also provides labourers to do the work. True China has a nasty habit of awarding contracts for infrastructure projects to Chinese firms (all four new world cup stadia were built by Chinese companies) who ship in Chinese workforces wholesale, but this is no different from the way American and British companies operated in the past. Furthermore, many of the projects China funds run at a loss, effectively making such initiatives a form of aid.

Critically, China provides insight into building new states that the West simply cannot. To many frontier market economies China represents an ally and guide that can help them mature through their industrial age, providing a road map to an economic independence that has long eluded them.

NS

Quality brands banking on success

2010-08-04T15:05:00.000+01:00

Within the next 12 months, the retail banking sector is set to become increasingly competitive. With Tesco, Virgin Money and the Post Office expected to launch into the current account arena, current providers are getting jittery. And so they should.

Not only are these companies known for being easy on a thrifty consumer's purse, they also seem to have a vague understanding of customer service. As a customer of my (unnamed) bank, I can honestly say that I sometimes wish my bank manager would greet me with the middle finger before dispatching me with a swift kick in the rear. Anything would be better than the surly unhelpfulness and general confusion caused by its myriad of call centres. At least by taking the former approach, I would know exactly where I stood and could take appropriate action. Instead, I am treated to a theatrical display of West End proportions whereby the bank and its dastardly minions of doom go through the pretence of caring.

What they need is more competition. It's a sign of a healthy market place and hopefully the newcomers will focus their attention more on actually viewing customers as a help as opposed to a hindrance.

SI

Testing times

2010-07-28T13:01:00.001+01:00

Last Friday the Committee of European Banking regulators (CEBS) published the long awaited results of its stress tests into the region's leading financial institutions. The tests revealed that seven of the 91 European banks had failed to meet the capital requirements.

Even before the test results were published, many market commentators had concluded that the tests were pointless and unlikely to achieve very much. The whole endeavour was not exactly helped by CEBS' website failing its own stress test and crashing just as the results were published. Who said the Europeans can't do irony?

Many critics have pointed to the low capital ratio required to pass the tests and the fact that all the tests relied on data supplied by the banks and verified by their local regulator. Grave uncertainty has also arisen surrounding the consistency of the methodology - with implementation of the scenarios depending to some degree on the local regulatory authorities. It has also been hard for analysts to ignore the fact that the criteria were not only less onerous than testing already conducted by some regulators, but also than some of the banks' internal worst-case forecasts. So, the 'adverse' scenario is not really all that adverse: it assumes only a slight output contraction and market losses on government debt, but no actual sovereign default scenario.

However, the fact that investors still seemingly mistrust capital adequacy rules and that these tests have been branded by many as neither uniform, transparent nor stressful enough, may ultimately not matter that much. The clearest sign that the tests have set the European banking industry on the path to recovery will be seen in interbank lending and the capital markets – if these do not improve then Europe will have to think again.

SS

Three barrels full – BP

2010-07-26T09:27:00.002+01:00

The latest furore which has spouted forth from the well that is the BP PR machine is going to take just as long to clean up as the black mucky mess which continues to wash up onto the shores of the Gulf of Mexico. The three doctored images which were uploaded onto BP's Gulf of Mexico response homepage this week have arguably caused more damage than some of the many other gaffes that have dogged BP's PR efforts since the first announcement of the oil spill in May.

In fact, BP has single handedly violated almost every rule of successful public relations, starting with the first one, which is to 'tell it all and tell it first', they then quickly broke the second which is to 'allow only the well trained and polished spokespeople speak to the media and public'. The problem is not that there are mistakes and crises (there always will be and there is no way around this – especially with something as hazardous as deep-water drilling). However, not all crises have to mean job losses, careers ruined, staff illness, environments destroyed and international condemnation. The problem in BP's case is the challenges came from the poor handling of communications from the start, which are in essence, self inflicted wounds which have continued to cause injury long after they've been made. PR in this instance seems to have been used as a band-aid rather than a tool for getting the right messages out to the right audiences in a clear and simple manner. Public relations isn't about exaggeration and manipulation, it's about communicating the public what is going on within a company in a controlled manner.

As a result, BP is now fighting a PR firestorm on all fronts, from peeved shareholders, to the outraged local community who have had their livelihoods put on hold and in danger, to the US government, to vocal national and international environmental groups and to employees and health and safety unions. They are also fighting fires from the inside, trying to manage and keep a lid on its internal communication channels (including the management of some of its renegade spokespeople). This includes its (current) Chief Executive, Tony Hayward, who bemoaned recently, 'I want my life back' – hardly the positive PR message that BP is trying to communicate to the world audience who is watching the disaster with the grim fascination of a car wreck they can't tear their eyes away from. In fact, it must feel like a touch of déjà vu for BP's head of communications Andrew Gowers, former editor of the FT and also the man who incidentally manned the PR at Lehmans Brothers during their collapse.

The images, which have sparked the increase in criticism, include the cut and paste doctoring of two images of the Houston control room where BP staff are monitoring the leak and one from inside a helicopter over the Gulf. It's called into question one of the consistent messages BP has been trying to drum home – transparency. Many are now jumping on BP's alleged lack of transparency as an attempt to continue to manipulate versions of the truth months on from the initial disaster. BP has since now gone on the front foot to post both original and fake versions of the photos on flickr which hasn't appeared to lessen the condemnation any further.

Perhaps the lesson or message that is most important to members of the UK financial services industry is that no one is immune. But regardless of the type of incident, if PR is used well and effectively, the damage can be limited. For as long as most can remember BP has always been viewed as an untouchable financial giant with most of the media coverage largely centring on its share prices and presence as a an international conglomerate. It has now suddenly and spectacularly spiralled into a reputational death spin which could only be described as a PR director's worst nightmare and has seen nearly every aspect of its business criticised on the back of a protracted and seriously damaging oil leak at one of its facilities in American waters.

BP is to up their neck in this mess and there's no telling where the next gaffe or possible reprieve will come from. The only part which is clear is that somewhere along the way PR policy got put at the bottom of the to-do list.

JH

AIFM – a ticking time bomb?

2010-07-16T10:18:00.001+01:00

For some in the investment industry the Alternative Investment Fund Managers (AIFM) directive is just another layer of unnecessary legislation clogging up the headlines. However, for a large portion of fund managers and investors this directive could have destructive effects on the way they conduct their business.

The directive effectively aims to establish a regulatory framework for managers of collective investment undertakings which will facilitate monitoring and supervision of systemic risk, increase disclosure and transparency and enhance investor protection. The proposal was introduced on the 29th of April 2009 by the European Commission and came to life through a disturbingly short consultation period. Viewing it as rushed and ill-prepared, the chairwoman elect of the European Private Equity & Venture Capital Association commented that it "will crush venture and other sources of innovation capital". Sadly, venture capital is not the only victim of this directive; increased costs and a reduction in choice and scope of investments will have a far reaching impact. The IMA's Jarkko Syyrila said that "Anyone who has savings, anyone who has invested in a fund, an investment trust, a real-estate fund, everyone who has a pension in Europe – a Greek or German pension fund – will be negatively impacted by this directive."

Commission figures suggest that in the EU alone around 30% of hedge fund managers, managing almost 90% of assets of EU-domiciled hedge funds, will be affected by the directive. However, repercussions are not limited to the EU. Tim Geithner, US Treasury Secretary, stated that the directive could cause "a transatlantic rift" by discriminating against US firms and denying them access to the European market. The US wrote the book on reactionary and protectionist policy, so perhaps the rift that's already well oiled at the moment, will have a direct impact. If Europe legislates first then some feel the US will not exactly be backward in coming forward with their own legislation. Tit for tat.

The directive's progress has been anything but smooth with a litany of delays, postponements, criticisms and antagonism from major influencing parties and institutions along the way. With over 1000 amendments at one point, the directive was eventually passed in May and will be put to a final vote by the European Parliament in the coming months – providing no further postponements.

Jean-Paul Gauzes, the French MEP and AIFM champion, recently replied to the exhaustive criticisms: "I know that most of private equity and hedge funds are perfectly respectable, but there have been some problems, such as in Germany where companies were bought and broken up, which have been very traumatic". I have to admit I'm not entirely convinced by his argument to potentially destroy an industry that last year, in the UK alone, generated over £60bn in tax revenues – perhaps events will turn out to be a little more than traumatic this time.

LB & AVD

Is social media really worth it?

2010-06-30T14:05:00.000+01:00

Undoubtedly, social media is increasingly seen as a useful additional PR, advertising and sales channel. In 2010, for the first time in 25 years, Pepsi didn't run a Super Bowl ad in 2010, but focussed on a $20 million online Cause Marketing campaign instead. Dell has reported it generated $6.5 million of sales over Twitter, Sony Vaio's Twitter account has generated over $1 million in sales, and Blendtec's YouTube campaign led to a five-fold increase in sales.

With social media activities starting to pay off for corporates (after all, they're free), they also become more attractive for investors. Paul David Hewson (better known as U2.0's Bono) and his private equity firm Elevation Partners have just acquired 5 million shares in Facebook for $120m, following the purchase of 2.5m shares for $90m in November 2009. Until now, private investors have pumped more than $830 million into Facebook which is by far outperforming Zynga (the Farmville game maker who has recently seen another funding of $147 million, bringing total funding to $360 million), Twitter ($160 million) and LinkedIn ($103 million).

Looking at current market evaluations, these investments make perfect sense: Facebook is valued at $14 billion, Zynga $2.6 billion, Twitter $1.5 billion and LinkedIn $1.3 billion. Estimated advertising revenues for Facebook in 2010 are within the region of $1.1 billion to $2 billion. Twitter (so far) makes money by partnering with Google and Microsoft, and is currently testing advertising options. The value of Twitter is now estimated at more than $1.5bn (it was already valued at more than $1bn before it had generated any revenues at all).

So the answer to the question seems to be a straightforward yes. Social media does make money and people do like Facebook & Co. Investors do invest and do make money too, and the market valuations are reasonable, given the platforms do the right things and do things right. The poster announcing the movie about Facebook sums up the current climate of self-confidence: you don't get to 500 million friends without making some enemies. If "some enemies" become "many" because of an overload of commercialisation or privacy concerns however, there might still be trouble ahead.

RR

The Coalition's Cuts Are Now Upon Us

2010-06-28T14:34:00.000+01:00

After all the talk, the Chancellor's much anticipated deficit-busting budget is finally upon us. Mr Osborne termed it "tough but fair" but many might not subscribe to his verdict.

For those in the public sector, it's unpleasant. A two year pay freeze, essentially a pay cut (as Mr Cameron himself confessed), a smaller pension pot and the potential for further job cuts.

A recent Policy Exchange report revealed that on average those in the public sector spend nine fewer years at work over their lifetime and earn 30 per cent more than their private sector brethren. Despite these generous benefits – or perhaps because of them – productivity in the public sector has fallen over the past 10 years, while productivity increased in the private sector 28 per cent. Surely it's about time the gold plated public sector pensions were abolished and pay came in line with the private sector? On the subject of pay, the Policy Exchange report found that median gross pay is £22,417 in the public sector and £19,932 in the private sector.

A problem is that without public sector jobs, unemployment will obviously rise and thereby leave those in work to foot the bill – unless the Tories' plan for the private sector to increase employment is successful…I guess that is a story yet to be told.

The private sector has perhaps fared slightly better, with the eradication of the tax on jobs proposed by Labour and the national insurance threshold being raised making it cheaper for companies to employ staff. That said, it was a surprise that capital gains came down under a Labour government and perhaps more surprising that the Conservatives have increased it.

What surprises me most is the uproar of furious liberal democrat supporters over the VAT increase. It is true that Nick Clegg campaigned against it, however there is one thing that needs to be remembered – it is a Conservative led government and Mr Clegg was never going to get his way on everything. And, is being £33 a year worse off on average really worth splitting hairs about?

RS

To cut or not to cut?

2010-06-28T14:21:00.000+01:00

One of the most interesting aspects of last week's Budget was the divide in the press reaction. Edmund Conway writing for the Daily Telegraph said "this was – in both senses of the word – one of the most "courageous" Budgets in living memory" before going on to argue that the extent of cuts to public spending further needed is likely to test the Government to its limit. While Polly Toynbee, who David Cameron famously said he wanted the Conservative party to be more like, writing in the Guardian, said of the Budget and its central aim; "there was no necessity to create a surplus in six years, returning to depression economics with mortal risk of sinking the country into second recession or slump."

Okay so these are only two viewpoints. And yes, they're from two of the most diametrically opposed national newspapers in regards to political leaning. Yet, after twenty five years of broad ideological consensus between the main parties, the budgetary deficit we are now facing appears to be creating some clear divides in Britain's political class. The coalition government believes in the need to slash the budget and raise taxes while the Labour Party, and whoever is chosen to lead it, argue that it is important not to slash governmental spending to drastically in the midst of a recession.

Are we seeing a return to ideological politics? Are the Government's and the Labour opposition's disparity motivated by some genuine difference of opinion as to how to solve the economic crisis? Probably not, and to this extent most interesting is the response of Vince Cable, who over two months ago was against budgetary cuts but now is regularly reeled out in front of the TV cameras to justify them. Mr Cable argues that he has grave concerns that if Britain didn't start cutting today, we would be tomorrow's Greece. Whether this is correct or not is debatable. However, what is clear is that Mr Cable now believes that cuts are necessary to ensure that foreign investors who own pounds (principally emerging market central banks, who own the vast majority) don't lose confidence in Britain. It is pure political pragmatism.

So are we returning to ideological politics and does it even matter? It probably doesn't matter as even though the majority of voters, those who voted for Labour and the Liberal Democrats, were against cutting before the election, the cuts remain. This begs the question, in a global market economy, is a country's destiny no longer shaped by its own people but rather the views of outside investors, and if so what does this mean - not only for our political parties but also for the sovereignty of the nation state. "To cut or not to cut", is no longer a question for the electorate but rather the wider global economy. It's interesting in this context to refer back to comments made back in February by the then shadow Chancellor, George Osborne, warning that significant early cuts were the only way to preserve Britain's economic sovereignty.

JCL

Oilier than thou?

2010-06-11T17:15:00.001+01:00

It's perhaps surprising that no-one has yet calculated whether the acreage of trees felled to supply the newsprint expended on the BP oil leak story has been more environmentally damaging than the spill itself.

The still-growing oil slick in the Gulf of Mexico is, of course, a genuine ecological nightmare. But from a purely "news" perspective, what a story! It's uncommon for one incident to dominate the headlines, globally and more or less continuously, for nearly two months, and still have the potential to run for a long time yet. What makes it so enduring is the way new aspects have developed, the latest being the heightening tension between US policy makers and BP's shareholders, (of whom two significant sub-groups are Americans and UK pension funds).

Having earlier vowed to "keep its boot on the throat of BP", the US administration has continued to use strident language without, apparently, succeeding in convincing US public opinion that it is achieving much. As Philip Stephens points out in today's Financial Times, by castigating BP Chief Executive Tony Hayward and vowing to "kick ass", President Obama "has cast himself in the role of furious but hapless bystander".

Aggressive posturing from the Whitehouse may be understandable, given the imminence of mid-term elections in the US. But not only does the rhetoric have potentially damaging implications for UK pension funds, it's not doing much for Anglo-American relations either. Some UK commentators, for example, have been unable to resist dragging out examples of similarly catastrophic US corporate disasters which did not elicit quite the same level of opprobrium.
Others have sought to identify the extent to which the US government, despite its posturing, remains "in thrall" to the oil industry. And this funny contribution from the creator of the Dilbert cartoon, suggests BP could ultimately benefit from the whole affair.

AF

Investment Banks and Gordon Banks

2010-06-10T10:18:00.003+01:00

Finally, Goldman Sachs delivered what we've all been waiting for. No, not the FCIC requests for documents and interviews – in fact, the Wall Street giant has been hit with a subpoena for a "deliberate and disruptive" failure to co-operate with requests for information about its role in the credit crunch that shook the global economy. It doesn't have anything to do with the SEC fraud charge either...that would be far too prosaic for such anticipation and excitement. What I'm talking about is the publication of Goldman Sachs World Cup and Economics 2010 – the fourth book they've compiled since debuting at France '98. With WC2010 one day away, the only Fabulous 'Fab' that football fans want to hear about is Fabio Capello or Cesc Fabregas. So, Monsieur Fabrice Tourre, back in your box, while the rest of us watch the beautiful game enraptured.

The World Cup paper is a fairly hefty tome – some 75 pages – but makes surprisingly easy reading (provided you like football of course). Jim O'Neill, Goldman's chief economist and avid football fan, kicks off the report and as you might expect from the man that coined the Bric concept, mentions it repeatedly. Honestly Jim, it's always 'Bric this Bric that'...enough already. The acronym doesn't even hold up for the World Cup (notwithstanding Brazil) as Russia, India and China didn't even qualify.

Some may ask what all this has got to do with the world of finance and, despite my best efforts to turn this into a football blog, that would be a fair question. Well, as outlined previously – the world of football and finance are intimately acquainted and the business of the beautiful game is just as prevalent when we talk about nations as when we talk about domestic sides. In fact, the sovereign state has it all to play for as the World Cup offers real revenue and growth potential for hosts. Igor Shuvalov, First Deputy Prime Minister of Russia, makes this point in the Goldman report when discussing Russia's 2018 bid: "Modern football is a whole industry. It includes complex infrastructure, such as top stadiums, rehabilitation centres and training bases, as well as sports gear and equipment, to say nothing of advertising and TV rights....Intensive development of football infrastructure will act as a huge boost to both regional and national economic development."

Moreover, the World Cup also provides a truly global forum to highlight the ambitions and capabilities of a country. For instance, what better way for Brazil to communicate its status as an economic force, than to put on a stellar World Cup in 2014 and then Olympics in 2016. To keep with the Bric theme (sorry) – China did a similar thing with the Olympics two years ago. Beijing 2008 was a formidable event that showcased the economic might of the nation to a global audience.

Towards the end of the Goldman report, my attention turned to the section on Spain entitled "Leading in Football, Lagging in the Economy." Angel Ubide, a former Real Zaragoza FC player and Director of Global Economics at Tudor Investment Corporation, makes some great comparisons between the success Spain enjoys on the pitch compared to its economic shortcomings. He concludes: "Without a question, the football team has been more dynamic, creative and successful than the economic team, and thus the odds of success in the World Cup are certainly much higher than the economic league. Good luck to all." His erudite comments are a long way from the monosyllabic and anodyne trivialities we're used to on Match of the Day each week.

Anyway, Jim O'Neill and his gang predict that England, Argentina, Brazil and Spain make the semi-finals. I'd certainly settle for that. God bless the World Cup.

JS

Sympathy for the devil

2010-04-21T10:08:00.006+01:00

Please don't judge me but a small confession to begin: I actually feel a little sorry for Goldman Sachs. I know, I know, how much sympathy can you really have for a bunch of people who are richer than God? But remember, the bank is doing God's work, so presumably they should be reimbursed accordingly.

The giant vampire squid has been flogged by media commentators and political opportunists, the PM included, with such wilful abandon that it almost seems sadistic to watch. Many critics see the bank as guilty of the worst excesses of the bull market bubble and have certainly not been backward in coming forward. This seems to have reached a crescendo following the SEC's allegation that the bank is guilty of securities fraud related to the structuring and marketing of synthetic collateralised debt obligations (CDOs) linked to subprime residential mortgage-backed securities.

The degree of Schadenfreude on show following the SEC and FSA probes highlights the animosity against Goldman. However, in this case it seems potentially misplaced and perhaps a little premature. Bloomberg reported that the SEC vote was split 3-2 to approve the enforcement case against the bank. The fact that the committee was divided denotes some degree of uncertainty and when combined with seemingly "nakedly political" posturing and timing from the SEC and the Obama administration in turn, the case seems unduly vindictive to boot. Not a great start.

The specifics of the case have not been unveiled and as The Times' David Wighton writes: "It is too early to draw any but the most tentative conclusions about the Abacus affair." Much of what has been written in the press seems to focus on the fact that the trader at the centre of the affair referred to himself as "fabulous Fab" in his gloriously hubristic email to a colleague: "More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic]!!!"

This email proves nothing other than the fact that Fabrice is a bit of a prat who refers to himself in the third person. It is certainly not an indication of some elaborate and Madoff-esque subterfuge to defraud investors. The whole affair seems far more prosaic than that. The conflict of interest that follows the Bermuda triangle of CDOs created and checked by Paulson & Co, Goldman Sachs and ACA is one thing, but proving deliberate and calculated fraud is quite another.

The case is interesting because it involves four things that have captivated the market throughout the financial crisis – Goldman Sachs, exotic structured products, hedge funds and the regulators. Investors in the CDOs have protested against the way they were misled but, regardless of whether that is true or not, their refusal to take accountability is a microcosm of the whole credit crisis. Highly sophisticated investors use these products, not your average punter. They have due diligence teams that pore over documentation, and if they didn't – what the hell happened to caveat emptor? Breakingviews neatly summed up the debate: "As politicians and regulators pick over the SEC's allegations, they might keep in mind the synthetic CDO tango took two."

In terms of Schadenfreude, Goldman's competitors and critics should perhaps be wary to cast the first stone. Goldman was a major player in the CDO market but certainly not the biggest – Merrill Lynch, Citigroup and UBS all underwrote more securities according to Nomura. The regulators are clearly taking a hard look at the CDO market and given the sheer volumes traded, you would expect a similar case of "disreputable activity" to have taken place. Critics should also note that Goldman is run like a military operation. They are tough and will come out swinging – yesterday's bumper first quarter profit announcement and accompanying "aggressive defence against US fraud charges" highlights that they are a force to be reckoned with. They will not disappear gently into the night.

Goldman is an extremely difficult firm to like, but provided they can ride out the reputational storm, I doubt that their shareholders and heavily remunerated employees will be too troubled by this specific case (wider regulation is another matter). If Goldman was to suddenly adopt a football terrace style chant (chance would be a fine thing) they might well take their inspiration from Millwall FC: "No One Likes Us – We Don't Care."

JS

Tinker, failure, closure, grief

2010-03-29T11:01:00.001+01:00

There can't be many people who genuinely believe any government has set out to systematically undermine UK workplace pension provision. But you could be forgiven for thinking politicians are genetically programmed to indulge in well intentioned tinkering, with irredeemably baleful consequences.

Today's survey from Punter Southall provides a fairly stark picture of the malaise into which the once vaunted UK pension system has descended. One in four employers report staff cutting or suspending pension contributions, only one in twenty still offer defined benefit schemes to new employees, and there is a rising tide of resentment against the pernicious impact of government actions. While nearly nine out of ten respondents anticipate a change of government in the forthcoming general election, only 13% think this would be a good thing, and a whacking 57% think it would make little or no difference.

A popular idea which emerges from the Punter Southall study, as well as from a broad range of other pensions commentators, is to take politics out of pensions. If the pensions industry craves one thing, it is a stable long term regulatory environment in which to get its act together. Politicians who win power have a range of priorities, but by far the most important is to get re-elected within the next five years. As we all know, even a week is a long time in politics, but five years is barely a blink of the eye in the glacial world of pensions.

Given this asymmetry between the time horizons of the pensions industry and the ministers whose decisions shape it, or mis-shape it, perhaps the Pensions Commission might serve as a useful template for the way forward. Chaired by Lord Turner, the Commission's 2005 analysis and recommendations achieved the unusual feat of attracting support from across the pensions community and, broadly speaking, across the political spectrum. Maybe a similar body, made up of representatives from the various stakeholder groups, and freed from the straightjacket of political short termism, could come up with sensible, practical and effective ideas for reform of the pensions system. Maybe along these lines, in fact?

AF

Some knights, a vampire squid, one acronym and a chunk of debt

2010-03-08T17:07:00.001Z

Hostile takeovers, excessive leverage, boom and bust, board room wrangling and exorbitant pay packets...might sound like just another day in the financial markets but it's also the perilous state of English football at the moment. The business of the 'beautiful game' is now played out right across the front, middle and back pages. Just a few years ago, when things were ostensibly all swell in the market, there used to be a rough order to things – politics and social affairs on the front, business in the middle and sport on the back. Now, things are a little more blurry.

The fate of Portsmouth FC is a cautionary tale in just the same way as Bear Stearns, Lehman Brothers, RBS or the other financial institutions which imploded. They were debt laden, engaged in aggressive M&A activity (read transfer policy), remunerated their stars heavily and crested the wave of cheap credit. They did rather well on that strategy for a time – much like RBS (remember when Sir Fred was the toast of the town) – winning the FA Cup less than two years ago. However, if something seems too good to be true; it often is exactly that. So, sure enough, Portsmouth duly became the first Premiership club to fall into administration on 26 February.

Now, in the red corner, we have Manchester United – the most successful English club of recent years and a footballing powerhouse with a fan base that straddles the globe. Their debt levels have attracted attention ever since the Glazers took over the club in a highly leveraged deal in 2005. However, the various restructurings of late and the effective 'Green-and-Gold' protest movement has galvanised supporter animosity and the Glazers have really been feeling the heat. This has arguably come to a head with the surge of interest which the Red Knights consortium has generated.

In keeping with the front-page theme, The Observer led with a story proclaiming how Alex Ferguson was "backing bid to buy United", according to unnamed City financiers. Whether the Red Knights can really wrest control away from the Glazers is unsure but, like all good takeover struggles, the clash of personalities and ideologies is what we all love to see. The embattled Glazers are certainly the pantomime villains in this production of Twelfth Night...perhaps that should read as Twelfth Knight? On that note, enter stage left those intrepid Knights, led by Goldman Sachs' Jim O'Neill, as he rides proudly across on a giant vampire squid. [As an aside, has anyone's financial career and industry standing been so elevated by the simple use of a four lettered acronym – Bric, really?]

As The Sunday Times highlighted, Mr O'Neill is an unlikely hero – a Goldman Sachs banker and the Old Trafford faithful make unlikely bed fellows. However, the Glazers are public enemy number one and the Red Knights' ideology appears infinitely more palatable to the fans. Indeed, the notion of the supporter-owned club (a la Barcelona, Real Madrid and several German clubs) is gaining credence all around. "In an ideal world all clubs would be controlled and run by their supporters according to democratic principles," Uefa said in Vision Europe, a document setting out the direction and development of football over the next decade. In fact, a Uefa report last month revealed that 18 of the Premier League’s 20 clubs owe more combined than the rest of Europe’s top divisions put together. The debt for the 2008 season stood at £3.4 billion, 56% of the European club total.

All this makes for a compelling financial story. Who knows, perhaps one day football and business will become so closely aligned that the likes of Manchester United are 'too big to fail' and the Ronaldo's and Kaka's of the world are packaged into complex structured products, securitised and traded in tranches with inferior players, eventually leading to the dislocation of the global economy. Perhaps a government bail-out of a club will take place, leading to the creation of a 'good' club and 'bad' club – thereby classifying John Terry and Ashley Cole as 'toxic assets.' Actually, maybe not.

JS

Ay Ay Icap!

2010-02-17T13:44:00.003Z

Some market commentators have seized upon Icap's "broad ranging strategic review" of its cash equities businesses as another sign of the structural shortcomings at play within the mighty inter-dealer broker. After all, shares plunged nearly 30 per cent at one stage following a profits warning last month. However, under the stewardship of chief executive, Michael Spencer, Icap has consistently demonstrated itself to be an innovative market force and the leader (followed by Tullett Prebon) in the IDB sector. While there are certainly issues that require remedying, the fact that Spencer has placed his political ambitions on hold to focus on the business should go some way to assuage nervous investors. The Telegraph's Questor certainly believes so, tipping punters to buy shares yesterday, and adding that "it would be wrong to underestimate Spencer himself."

The ill-fated foray into cash equities has undoubtedly been faltering and progress extremely slow. Spencer bowled into the sector at the tail end of 2008 to try and fill a gap in the market left by the demise of Lehmans. Icap recruited heavily and aggressively – hiring over 200 staff to join the division. To be fair to Spencer, he saw this as a once-in-a-lifetime opportunity to profit from the glut of available talent, as many trading desks were decimated in the wake of Lehmans.

And, he was definitely not the only one to share this opinion. There was considerable activity from the ‘traditional’ brokerage firms, large and small, and from the new wave of smaller providers, to seize the market opportunity that the demise of Lehmans, plus those of Dresdner Kleinwort and Bear Stearns, created. BarCap and Nomura were certainly conspicuous in their hiring sprees as they looked to build their equity teams. However, cash equities is a fiercely competitive business, and it seemed doubtful that the size of this market opportunity was sufficient to sustain every individual business plan. Unfortunately for Spencer, Icap faltered. Breakingviews highlighted some of the inherent problems the IDB faced: "Cash equities is a difficult, low-margin and commoditised business. The costs are high, and the continued need to invest in technology, keeps them that way. The business is dominated by a handful of big banks with the scale to make it pay."

Icap will bounce back from the problems with cash equities and as some analysts have already noted – Spencer has the bottle to simply shut the unit down rather than let it limp lifelessly onward. Panmure Gordon even notes that winding up the business will be of little strategic importance to the group. Nonetheless, Icap still needs to navigate some choppy waters – notably regulatory reform, as Obama's plans to curb proprietary trading by banks will undoubtedly hit revenues. To keep with the nautical theme – Spencer certainly has the wherewithal to keep an even keel.

JS

Freddie Starr ate my recovery

2010-01-26T17:04:00.003Z

It’s official. The UK is out of recession.

According to the government's statisticians, the Office for National Statistics (ONS), the economy grew last quarter by 0.1%, ending six consecutive quarters of negative growth and bringing to a close the longest recession since before the Second World War.

So that's good news right? Surely it's time to roll out the bunting and crack open the champagne (well, Asti, given the current market) and put on some B.B.King?

Well not according to some.

Despite the hopes of services shaking the banker bonus tree, it seems one or two commentators are not quite ready to sing along just yet. But then perhaps that's to be expected as we languish in the post-festive-pre-payday gloom. So it seems Blue Monday has slipped into a Terrible Tuesday.

Indications are that any growth is likely to remain anaemic, and this has led some cabinet members to be reportedly fearful of taking any responsibility for something that in most scenarios would be classed as 'good news'. But then perhaps that is sensible given the possibility of a return to negative growth in Q1 2010, which would be reported statistically 11 days before the likely day of the general election, 6th May.

With the two major parties preparing to draw the battle lines along how best to sustain the 'recovery', any such figures would not exactly enhance the incumbents' self-proclaimed reputation for economic competence, a point not really helped by what seem now to be rather optimistic growth expectations for this year and next year. They can, however, take comfort from not being the only ones caught out.

So what now and what's in store for the 'fledging recovery'? Well, any sort of long-term plan would be useful. The Daily Telegraph points to private sector investment and overseas growth as areas to deliver the growth needed to rescue us from being stunted by the fiscal stimulus plans. That does not seem to be evident yet, however, and certainly nowhere near on the systematic scale seen in China, which clearly recognises the importance of scientific research and retention of knowledge as the key to its future.

Perhaps a change of perception? The Daily Telegraph talks about a two-speed global economy with opportunities being thrown up by the turmoil surrounding fiscal exit strategies.

But then perhaps we are justified in being wary of celebrating GDP growth if the New Economics Foundation paper yesterday is to be believed. With developed nations assuming continual growth, perhaps the view is just flawed. They illustrate this point with a short video called 'The Impossible Hamster'. If a hamster doubled in size every week for a year, it would weigh 9 billion tonnes – enough to give Freddie Starr serious indigestion. So why should we assume GDP should continue growing, particularly when we consider that environmental concerns may pin back the recovery over the long term?

Food for thought indeed.

So, let's look on the bright side (for the time being at least) – the days are getting longer, payday is nearly here and if Freddie feels peckish, he'll probably opt for a Chinese hamster instead. As Frankie Boyle has been heard to say, "Help yourself to nibbles – (he was our favourite hamster…..)"

AF

Barack to the drawing board

2010-01-22T16:18:00.003Z

I have missed Barack Obama. I devoured his campaign coverage to levels of minor obsession and had grown used to seeing his face strewn over the covers of publications the world over. Recently though, it seems Obama has been hibernating. Maybe he has been finding it difficult to make it into the office due to all the snow? Or can that excuse really only apply to Londoners? Either way he has not exactly been marking his first year in office with the media frenzy many would have expected twelve months ago. But now he's back!

Obama has, some suggest, produced the sword to deliver a final blow to the Wall Street bull. Exhausted with the media frenzy over bankers' bonuses and deaf from the screams of the American public crying "kill" "kill", could this be the death of the big bank: 2010's Glass-Steagall finale?

I doubt it. It is important to remember these "Volcker Reforms" are just proposals. We are not about to see the end of proprietary banking on Monday. As with any American legislative proposal, and especially any introduced by the current president, it will be months before anything is actually set in stone and the big banks are forced into selling off their hedge funds and private equity groups. Goldman Sachs and JPMorgan can rest easy this weekend. What will no doubt follow will be months of lobbying. The Wall Street top dogs (what can I say I'm not a cat person) are getting quite used to spending time in Washington D.C. By now, they are probably thinking of the Holiday Inn on Capitol Hill as a second home (or fourth or fifth in many caes). While the rest of are still ploughing through the details of the proposals, lobbyists will be weaving loop holes that will ultimately produce very little (if any) changes to the too-big-to-fail banks. When tired of this we can watch bank share prices yoyo in front of our eyes.

This of all proposals comes at a terrible time for Obama: after weeks of laying low, he reared his head at the end of the week only to find that he has lost Teddy Kennedy's old Democratic seat in Massachusetts and thus the crucial 60th vote in the Senate that he needs to pass this or any other bill. And to really kick dirt in his face when he's down, the Supreme Court voted yesterday to lift the ban limiting banks and other powerful companies from funding and supporting political candidates. Banks don't take too kindly to their share prices falling by around 5% across the board; so although in the past Wall Street has been a major fundraiser for the Democrats (and Obama himself), I get the feeling that the millions of dollars of Wall Street's campaign donations might be up for grabs right now. Enter the Republicans with open hands…

And what will all this mean to us in the UK? Well, the BBC reports that Shadow chancellor George Osborne has come out in support of President Obama's proposals but has covered himself by assuring that there would have to be international compliance. Chances are nothing much will happen once the election is out of the way. I suggest we all take the weekend to turn our attention back to donating to the Haitian appeal. There will be all of Summer (and Autumn and Winter...) to follow the 'Obama takes on Banks' headlines.

RK

Better the Red Devil you owe

2010-01-12T09:47:00.001Z

When the Glazer family took over Manchester United in 2005 the fans were in uproar as the Floridian family loaded the club with debt. The furore from the prawn sandwich brigade subsided as the Glazer's kept their heads down and Fergie led the Red Devils to three league titles in a row. However, what goes around comes around, and the interest on United's PIK loans is accumulating faster than Tiger Wood's mistress count.

Whatever Manchester United does will always generate huge attention and confirmation yesterday of its planned £500m bond has been all over the business and sports pages. In fact, while I think about it, the football community is more au fait with financial lexicon that you might expect. I vividly remember watching the telly when Sheikh Mansour took over Manchester City and thinking that a sovereign wealth fund acquisition was being discussed with alarming lucidity. Arsenal's Andrei Ashavin also displayed his financial savvy last year as he looked to renegotiate his £80,000 a week contract after being "unpleasantly surprised" by the UK's 50p tax rate for top earners.

Anyway, back to the point in hand...despite the blanket press coverage and element of doom saying from the more hysterical football fans, let's not get ahead of ourselves. By no means are United going to fall into the hands of the administrators – after all, the club also confirmed yesterday that it had recorded a pre-tax profit of £48.2m and a turnover of £278.5m for the year ending June 30. The club's success is also highlighted in the Deloitte Football Money League 2009 report, where they were ranked second in revenues, behind only Real Madrid. In fact, the report revealed that "had it not been for depreciation of sterling against the Euro, United would have leapfrogged Real Madrid." Making a profit in this market environment – and in a business as volatile as football – should certainly not be sneered at. Nonetheless, the debt burden is a real albatross round its neck, and the bond issue should go some way to ease the situation as they swap the expensive bank and hedge fund debts with the cheaper debts owed to bondholders.

The notes will be used to refinance the existing debt secured against the club rather than the PIK notes and as the FT reports, allow the club to "use up to 50 per cent of its cashflow to pay a dividend to the Glazer family, enabling them to repay a punitive payment-in-kind loan, which carries interest of 14.25 per cent." Fans bemoaning the lack of transfer activity of late to replace expensive flops such as Dimitar Berbatov could also take some comfort, as "United will also enter into a revolving credit facility to allow it to borrow an additional £75m, to be used for working capital and, probably, to help the club to continue buying players."

The United saga brings an interesting comparison to rivals, Manchester City. City have typically been regarded as United's unfortunate cousin – the pauper to their more illustrious neighbour's prince. However, since the Abu Dhabi Investment Authority's acquisition of the club, they are now armed with more funds than some countries' GDP. They've been spending money like it's going out of fashion and the ensuing battle seems to show parallels with another economic situation: a US-owned debt-laden mammoth versus an asset-rich Emirati pretender...sound familiar?

JS

Bonus of contention

2009-12-15T17:27:00.003Z

The confusion surrounding the banker super-tax and to whom it will actually apply still rolls on nearly a week after the Chancellor's pre-Budget report announcement of a 50% levy on all banker bonuses of more than £25,000, up until 5 April 2010.

Although at first it looked like fund managers, brokers and advisory boutiques had had a lucky escape, this now looks far from certain. Amid growing confusion over who exactly will and will not be affected (and a bit of controversy over the exclusion of N M Rothschild) the government is now expected to extend the scope to ensure that Rothschild (and others) do not slip through the net by way of their non-standard year-ends and other quirks.

Despite a lack of clarity, City heavyweights have wasted no time in launching a riposte - eight of Britain's top stockbroking firms have joined forces to fight the government and its tax. London-based interdealer broker Tullett Prebon yesterday went one step further when it offered staff the chance to move to one of its overseas offices in regions with 'more certain tax regimes.'

Although judged by some industry observers to have been a hasty move by Tullett, one can hardly blame them and others when the picture remains so unclear. Claims of a mass exodus to Switzerland are thought by many to be exaggerated, particularly with signals from our European neighbours that they will be potentially following suit. However this, combined with the 50p tax rate, does little to reassure overseas banks that the UK is a place to stay and do business.

However what is most likely to happen, and will be ugly, is a surge in guaranteed bonuses. Exempt from tax, higher base pay is likely to be taken up even more widely (adding to the already growing trend.)

In reality, it is this type of City remuneration, not bonuses, which is the most undesirable – not only because of the proven encouragement of highly risky and reckless behaviour but the hefty bonus contracts into which banks are then locked and may later on be able to ill afford . If profits start to fall, banks will have little flexibility to cut remuneration and it could well be in the end that it is the shareholders that lose out as institutions slash dividends in order to dish out the guaranteed bonuses to retain top staff.

SS

A question of trust

2009-11-26T12:23:00.001Z

Pension scheme trustees have been the whipping boys (and girls) of the pensions industry for many years. Four years ago, FRC Chairman Sir Brian Nicholson was amongst those bemoaning their inadequacies, while more recently, Ros Altman was arguing in the Telegraph that "the complexity of investment means you have to question whether they are equipped for the task."

The Pensions Regulator's new report raises similar concerns about whether trustees are fit for purpose. The report notes trustees must ensure they have the right skills and hire the right people to ensure their pension scheme is run smoothly, and reveals that fewer than half the 800 or so trustees surveyed by the regulator "felt 'very confident' about the internal controls put in place to avoid inappropriate investment strategies".

There are striking parallels here with a survey carried out back in 1998 by the then Department for Social Security (now DWP), which found that "most trustees came to the position with little or no direct relevant experience".

The picture which emerges is of a committed and well intentioned, if not particularly expert, group of people, faced with an increasingly complex task. A bit like a parish council or a board of school governors.

To the average pension scheme member, though, the "committed" and "well-intentioned" qualities probably provide enough reassurance to outweigh the lack of expertise. The alternative to the trustee model, after all, would be a contract-based pension, in which a third party – usually an insurance company – provides the employee with a pension arrangement as just another financial product (like an ISA or an insurance policy). And we all know what high esteem such service providers are held in.

AF

Is TUPE Loopy?

2009-11-17T09:54:00.001Z

TUPE the "Transfer of Undertakings (Protection of Employment)" in my view should probably stand for "Totally Unwanted Piece of Employment" law. I knew it existed but I suspect like so many of you, it never occurred to me that it would ever affect us. And then bam! - it comes along and gives you an almighty smack around the face when you are least expecting it (or wanting it for that matter).

The rub is that legislation was revised in 2006 when it was extended to include "service provision changes". That suddenly meant that if you worked in a service industry such as marketing, advertising or PR, you could be liable to take on staff from incumbent agencies and on the same terms as they were originally employed when clients, inevitably, move from one provider to the other. This is absolutely crazy. Often the reason clients change service providers is because they are either unhappy with the service they are getting or want a fresh team with fresh ideas or even a combination of both. And probably more importantly given current market conditions, agencies could land up with staff that they simply don't want or can't afford.

On the other side of the coin this can be used as a convenient way of off-loading the 'dead wood' - saving the expense of politely showing people the door. Of course, the savvy Directors among you will be quick to ensure that your 'rising stars' would not inadvertently fall within the rules of the legislation. But it does create a whole new downside risk when pitching for new business, especially when the incumbent is small and losing clients. Does it effectively create a potential liability for clients who take on a small PR agency and find that moving agencies suddenly has an unknown price attached to the pitch process?

Don't get me wrong, I am all for making sure that employees aren't exploited for the benefit of businesses, but I think this is one step too far. What happened to good old loyalty and duty of care? And the employee who is transferred between employers can hardly relish the prospect of arriving at their new company knowing they weren't chosen but were foisted upon them?

The new TUPE rules were criticised in The Lawyer a couple of years ago, which is ironic because in my view the only winners here are the lawyers (let's face it, the fees earned just explaining the legislation are likely to net them at least £1,000). And the losers? Well, pretty much everyone else really.

PD

Keeping the lifeboat afloat

2009-11-06T12:42:00.002Z

Not the quietest of weeks for the Pension Protection Fund.

The Fund was set up four years ago in response to growing clamour from pensioner lobby groups to provide compensation for people whose DB pensions fail to pay out when the sponsoring employer goes belly up. The initial funding comes from a levy charged by the PPF on all DB schemes, the level of which is determined by each scheme's exposure to risk – the greater the exposure, the higher the levy.

Earlier this week, it was reported that Transport for London is seeking a legal review of the levy imposed by the PPF. TfL claims the levy is "unreasonable", and other DB providers with similar concerns about the unfairness of the levy will no doubt be awaiting the outcome with interest.

And today it emerges that the Fund's deficit more than doubled in the year to March 2009, from £517 million to £1.23 billion, prompting – according to the Telegraph – "questions about the viability of Britain's pensions lifeboat".

Before anyone presses the panic button, however, it's worth bearing a couple of things in mind. Firstly, as PPF Chief Executive Alan Rubenstein recently pointed out, the PPF is currently paying out around £7m a month to its 13,000 beneficiaries, and while these numbers will increase in the coming months, the Fund already has some £3bn in assets, so "let's not pretend there are not extreme scenarios out there that could see us run out of money, but that will not be happening in the foreseeable future".

And secondly, Mr Rubenstein and his colleagues are smart enough to have learned from the American experience. The US equivalent of the PPF, the Pension Benefits Guaranty Corporation was set up in the mid seventies, and has amassed an eye-watering $33 billion deficit. Even so, the debate in Washington is around how to fix the PBGC, not how to get rid of it. What politician, after all, would want to be seen as the individual who allowed a lifeboat to sink?

AF

(You gotta) fight for the right to (counter)party

2009-11-04T14:44:00.001Z

Who would have thought that white-boy hip-hop could hold a mirror up to the financial markets...no, not me either. Firstly, we've got the Beastie Boys fighting for the right to a (central) counterparty and then InterContinentalExchange (ICE) leading the chorus of Vanilla Ice's 90s anthem "Ice Ice Baby". Post-Lehmans ("PL" – that's right we're coining a new acronym right here, right now) the concept of counterparty risk came to the fore – it always existed, it's just that people didn't really expect giant banking institutions to fail.

Not for the first time, the market was spectacularly wrong. Either way, the successful transfer of trades PL overcame a major hurdle in the clean-up operation and marked the clearing and settlement operations that underpin many markets as one of the few success stories of last year. This was not only true of equities but also the centrally cleared futures and OTC interest rate swaps, which were swiftly reallocated without loss to counterparties and without disruption. On the other hand, Lehman's unregulated credit default swaps and non-cleared interest rate swaps brought chaos to the market. The case for centralised clearing and the danger of defaulting counterparties was duly presented and the debate has rumbled on behind the scenes ever since.

Now, counterparty risk and centralised clearing have again been cast centre stage, with moves afoot on Capitol Hill to institute sweeping changes to the structure and regulation of the massive OTC derivatives business. Citadel's influential CEO Kenneth Griffin has been quick to weigh into the debate and called for the overturn of the 'merchants of status quo' and the worth of the centralised clearing model. Granted, his motives are probably not entirely altruistic – after all, this is the same Citadel that has a joint venture with the CME to clear credit. Self-interest aside, clearing is definitely back on everyone's lips – from exchanges to regulators to banks to hedge funds.

ICE, the futures exchange group, has been swift to react to the new world order and forged ahead in the race to clear credit default swaps. The group announced yesterday that nearly all new CDS contracts would be cleared centrally by the end of the month. This is impressive stuff and as Hal Weitzman writes in today's FT: "ICE has taken a strong lead amongst exchanges". This is probably a wise decision and as Jeremy Grant relayed earlier in the week: "governments and regulators in the US and Europe have made wider use of clearing – particularly in the over-the-counter derivatives market – a pillar of reform of financial markets." ICE has stolen a march on their competitors and given their relationships and collaboration with the main CDS dealers has reportedly cleared more than 43,000 index trades in Europe and the US with a notional value of more than $3,5000bn.

This is a big, lucrative market and Jeff Sprecher, ICE's chief executive, has been in an understandably buoyant mood of late. Does this signal a return to confidence in the credit derivatives market? Perhaps so...in which case – ICE ICE Baby indeed.

JS

Playing ketchup

2009-11-04T09:32:00.001Z

M&S has reported sterling figures this morning. Great news for me, I am a share holder (albeit of about 2 shares) but that isn't the half of it..........

The best news I have heard so far this week amongst the doom and gloom of the usual business stories and the continued injection of cash into ailing banks (but that is another story) is that Marks and Spencer is to expand the sale of branded goods from a select number of stores to more than 600 stores across the UK. I am hoping this includes my local.

For years I think M&S have been missing a trick. You see the M&S own branded ketchup just isn't quite up to it. And the fact that you could buy a ready meal of the highest quality and a t-shirt at the same time was beginning to lose its appeal. I made the move from M&S to Waitrose so that I could get different brands but now I am going back and fast.

According to Mysupermarket I will also save some pennies. M&S is cheaper than Waitrose on 1,200 lines although Waitrose has retaliated by saying it is 6% cheaper on the other lines – we'll see. The battle for market share between these two quality food outlets has begun but I know where my loyalties lie........

LW

Ucits or lose it: life on the hedge

2009-11-03T09:12:00.000Z

Right now Ucits are hotter than Brad Pitt and Angelina Jolie in a sauna as hedgies fire off new funds into the market left, right and centre. About 75 to 100 Ucits funds are estimated to have been launched to date, a figure that rises to around 300 when Ucits hedge funds are taken into account. The sudden craze is partly due to high profile hedge fund names such as Man Group, Brevan Howard and GLG Partners launching replicas of their existing hedge funds in the Ucits III format. Some have claimed that hedgies are tapping into the Ucits space in a bid to trump the draft EU directive on Alternative Investment Managers due to come into force next year, whilst others say that hedge funds are keen to expand their investor base. But some industry pundits have urged caution that the conversion of complex hedge funds into Ucits funds could expose smaller investors to hidden risks.

Hedge funds will need to change their business model in order to survive..."transform or die" is a cry often heard in the press. But does the entry of hedge funds into the regulated, onshore Ucits space not threaten the traditional offshore unregulated hedge fund model? Could this be a sign that the traditional hedge fund model is becoming obsolete?

NB

Why don't you just switch on your television set....?

2009-11-02T10:56:00.000Z

Why isn't more PR effort focused towards broadcast media? From their behaviour it would seem that many PRs and their clients believe that broadcast is not a worthwhile medium. But the reality is that broadcast media dwarfs print media in terms of audience size and breadth. Around 65% of UK adults rely on TV news as their primary source of news, BBC One’s 6pm News and ITN’s 6.30pm News have 10 million viewers each night between them, and around 2.2 million people are listening to BBC Radio Four's Today Programme at 8am each morning. Compare this to the circulation of the Telegraph (around 800,000 at the peak of the MPs' expenses coverage) or Financial Times (around 400,000 and falling) and you begin to wonder why more PR teams are not focusing more effort on broadcast than on print.

There are many TV and radio programmes with large audiences that have financial content which requires expert commentators to appear as guests on the show. The most obvious is the 6.15am markets report on the Today Programme each morning, where a leading fund manager gives his or her view on the company news of the day – around one million educated, home owning, people mostly over the age of 40 are listening. If you could sell advertising during this slot ads would cost a six figure sum, but perplexingly the BBC find it difficult to find a pool of more than about 20 fund managers able and willing to speak for free. Wake up to Money (Five Live from 5.30am to 6am) has a similar slot and around 250,000 financially minded listeners tune in each morning to hear Andrew Verity and Micky Clarke's dulcet tones.

So how might PR teams go about taking advantage of the largely undervalued medium of broadcast? Clearly a different approach to print media is needed as press releases become largely redundant and the whole process really revolves around having a good expert commentator available for all those guest speaker slots. For this it is necessary to have a spokesperson who is articulate and able to explain complex issues in a way that the layman can understand. Once chosen specialist broadcast media training must be undertaken to fully prepare them. Equally important is that the spokesperson has to be willing and able to do any slots, anytime, at short notice – starting on smaller programmes before progressing to flagship ones and being aware that turning down opportunities (even at a few hours notice) means that they are unlikely to be offered a second opportunity.

If this can be achieved then you are ready to start putting them forwards and finding opportunities for them to appear on the TV and radio. It can take a little while to gain some initial momentum, but once underway you will quickly begin seeing and hearing your company name appear on the airwaves and reaching large audiences.

RT

Beer and Mortar

2009-10-22T17:32:00.001+01:00

House prices are rising again. Oh wait a minute, they've still got 17 per cent to fall. Ah, but we're alright because a 'survey of estate agents' has told us they are confident about the market again. (Who'd have thought?). Property and personal finance correspondents must be getting giddy by now as ratings agencies, building societies, the Land Registry and the Royal Institute of Chartered Surveyors continue to churn out their daily contradictory housing market research.

But just as we were getting bored of the 'are they or aren't they' debate, the regulator this week announced its latest initiative to prevent a re-run of the irresponsible lending that fuelled a large part of this decade's housing market boom. As part of its mortgage market review the FSA has proposed that mortgage applicants must disclose exactly what they spend in a typical week when they apply for a mortgage. And yes, that includes admitting to how many pints of beer you drink on a Friday night.

Now I'm not afraid to tell my mortgage lender how much I spend on shoes and wine – and thankfully I haven't taken up smoking since I last applied for a mortgage - but it's hardly a carrot for those all important buyers trying to get onto the housing ladder. Nor is it likely to revive the market by encouraging the banks and building societies to increase the number of home loans they offer – something that the government is trying to encourage. Sounds like another contradiction to me.

But there's mortar life than house prices.

LW

Too big to fail?

2009-10-21T15:45:00.002+01:00

Mervyn King's impassioned address to Scottish business organisations yesterday has been described as a declaration of war on the banking industry which is fair enough considering his decision to paraphrase Sir Winston Churchill.

King's cri de coeur has been brewing for some time. Regulators and policy makers around the world have recognised that in pulling the financial system back from the brink we have created a new predicament. Previously, banks may have suspected that central banks would bail them out if they got into trouble but recent intervention has now proven that banks can indulge in risky business without risking salvation from the taxpayer.

King said that "The 'too important to fail' problem is too important to ignore" and that "The massive support extended to the banking sector around the world...has created possibly the biggest moral hazard in history". The powerful rhetoric employed in his speech shows how much is at stake if regulators waste this opportunity with ineffective reforms.

Little over a year ago, when Lehman's employees were looting office buildings and the rest of us were contemplating what it would be like to live through another great depression, there was a sense that these events would mark a sea change in financial services. Reform was long overdue and the industry as we then knew it would be a much different beast in the future. A year hence though, what has actually changed? With the return of bonuses and the recovery of risky assets, there is little sense that any lessons have been learned or that the culture of financial services has much altered.

King's speech may have focussed on banking but it speaks to a much bigger problem. Now the industry is back on its feet and making money the impetus for reform has been lost. Self-interest once again dominates discussions and the topic of regulatory reform is being turned into a showcase for politicians. Policy makers must recognise that more regulation is not necessarily better regulation and engage in open and honest dialogue, not polemics and posturing.

The battle over how best to address the 'too big to fail' quandary is a worthy fight but is just one conflict in a much bigger war that must be waged if we are to avoid another crisis of this scale.

NS

Shake your moneymaker

2009-10-15T12:09:00.000+01:00

Amidst much hand-wringing over the slump in sterling over recent months, perhaps it's worth taking a slightly broader view of currency. A good while ago, our ancestors were looking for a medium of exchange to trade goods, and experimented with various things such as furs, stones, iron bars and blocks of salt. All proved to be fairly unsuccessful until gold evolved to be the most practical medium. For many years, most currencies were backed by physical gold, and the price of gold determined the value of a currency.

In today's society, the basic act of commerce has not changed, but entrepreneurs try to find new alternative ways to facilitate transactions. With the help of their new own currency, local retailers in Brixton hope to boost spending in the area, and this is just a recent example of a long list of micro-money and local denominations. There are more than 2,500 different local currency systems worldwide. All for a reason, probably.

The Internet has also created a range of digital currencies to be able to sell and pay for goods online. The Wall Street Journal recently produced a video covering this new world of peer to peer finance which also features our partner Hub Culture’s Ven, the only digital currency that can be used both online and off.

Whether this is the future of currencies, and the future of money indeed, remains to be seen. Clearly, the way we're going to pay for goods in the future is tightly connected to the way we'll interact and communicate in the future. And as far as this can be assessed today, there is an irreversible trend towards an even more digital life as we know it.

Alienate the Veteran Voter at your peril….

2009-10-13T14:46:00.003+01:00

Is the Telegraph being a bit churlish today, in reporting "anger as state pension rises by just £2.40 a week"? Fair enough, £2.40 a week is not a lot, nor is the £97.65 a week that state pension recipients will get from next April.

But if the then Chancellor, Gordon Brown, hadn't changed the rules in 2001, the state pension may not have gone up at all. The increase has, for many years, been linked to the increase in the September Retail Price Index which, as the Office for National Statistics announced this morning, actually fell by 1.4% last month.

Mr Brown's 2001 change meant the pension would increase by the September inflation rate or 2.5%, whichever is the higher. A point the Telegraph overlooked today. Along with the fact that it was Mrs Thatcher's administration which pegged pension increases to prices back in 1980. Before that, the benchmark was based on whichever was the higher between prices and earnings. Of course, the latter have outstripped the former fairly consistently since 1980, so the state pension, as a percentage of average earnings, fell from over 23% in 1981 to less than 16% by 2006.

In the interests of scrupulous impartiality, however, I should refer you to the same newspaper's coverage of David Cameron's commitment, announced last month, to match the government's intention of restoring the earnings link by 2015 at the latest. As a shrewd politician, Mr Cameron is all too aware of the power of the grey vote at next year's election.

AF

Commodity oddity....Citi loses the energy to trade

2009-10-12T14:05:00.002+01:00

There's an old investment adage that says 'run your winners and cut your losers' – a refreshingly simple concept for an industry that often does its best to confuse and befuddle. Lately however, this truism has been challenged by the two words that will terrify even the most hardened of bankers – 'executive compensation.' Citi's decision to sell Phibro, its energy trading division, has clearly been motivated by little else than regulatory pressure.

Phibro is a consistently profitable business (I know, how many can say that these days?) that has netted Citi around $371m a year in annual earnings over the past five years. This, as Anthony Currie of breakingviews highlighted: "equates to a profit margin of more than 50%, and has been a bright spot in the last couple of years as Citi posted billions of dollars in losses elsewhere." Granted, Phibro is not a huge business given the monolithic scale of Citigroup. Nevertheless, profits are profits and it was nice to see that a division could stand strong while the rest of Citi's edifice seemingly crumbled.

Occidental Petroleum, the energy and chemical giant, picked up Phibro for just $250m, which many market observers have described as "a pittance" considering the profits it once netted the bank. That said, the sale is not exactly a surprise given Citi's political and economic situation: a troubled bank propped up by the US taxpayer, an obligation to pay star trader Andrew Hall a whopping bonus of $100m, and a government that has executive pay firmly in its sights. Not exactly peaches and roses for the folks at Citi. So, to be fair to their embattled CEO Vikram Pandit, the pressure to hive off Phibro was so overwhelming that to do otherwise would have been untenable.

It's not actually the sale of Phibro that's alarming, as it was undeniably a forced hand, but rather the political machinations that promoted the sale. We all know the era of light touch regulation is behind us but politics and economics don't often make good bedfellows. In a fiery research note from Rochdale Securities' Richard Bove, dramatically titled "Socialism in Action", he argues that the sale does not make good business sense. Bove says the decision was not in the interest of the Citigroup shareholders and "also sets the pattern of what may prove to be a series of similar actions by other banks reacting to the government takeover of the banking industry." It's this aspect, rather than his socialist rant, that's of note and as FT's Alphaville concludes: "the regulatory environment for banks, and the government's tolerance for the high-risk, high-reward model of years past, is changing and not necessarily in what some bank-shareholders see as their interests."

The whole affair also throws the spotlight on the world of commodities trading and the growing band of non-financial players, including producers, dedicated commodity trading houses and utilities, who play an increasingly influential role in the energy trading markets. Many of these companies can dominate sectors of the energy markets, derivative as well as physical, without the same transparency and scrutiny that a bank is under.

Occidental's purchase of Phibro is illustrative of a wider shift in the commodities business and as the FT describes: "the latest episode in an exodus of specialised commodity trading talent from banks coping with greater government say over compensation." After all, why stay at an investment bank and face the constant ire of regulators when you can quietly trade elsewhere and continue to pick up huge pay packages. The FT says that "we live in Financial Times" – more like strange times if you ask me.

JS

Old age isn't so bad when you consider the alternative

2009-10-08T12:04:00.001+01:00

George Osborne's proposals on raising the state pension age have helped bring the longevity issue into sharper focus this week, and not before time. An interesting feature of the general reaction to Mr Osborne's comments is the relative equanimity with which the idea has been greeted – even The Guardian approved.

The state pension age has remained unchanged (at 65 for men and, at the moment, 60 for women) since the 1940's. Given that average life expectancy has been increasing by some two years every decade since then, it seems ludicrous that pension ages have failed to keep track. Even allowing for some quite extreme regional variations (figures from Punter Southall show male life expectancy is nearly 84 in Kensington and Chelsea, but only 70 in Glasgow), neither the demographics nor the economics add up.

Clearly, and regardless of who wins next year's election, this will have to change. Post-war UK births peaked at just over one million in 1964. Put another way, more Britons are celebrating their 45th birthday this year than any other age. As a member of that particular cohort, I have to say you'd be hard pressed to find a finer, more upstanding body of men and women. But if all of us retire in 2029, our creaking pension system – already severely stretched – could be brought to its arthritic knees.

So maybe the best way to look at this is, as Hamish Mcrae wrote in yesterday's Independent, to embrace the fact that we are an ageing society, and recognise that "countries that adapt well to ageing, which is happening to every society in the developed world, will become richer, healthier, better balanced and in all probability happier communities than those that fail to tackle an inevitable and indeed welcome feature of this century."

AF

Electioneering

2009-09-30T15:48:00.001+01:00

"I will stop, I will stop at nothing
Say the right things, when electioneering
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet
Riot shields, voodoo economics
It's just business, cattle prods and the IMF
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet"

Radiohead penned 'Electioneering' back in 1997, shortly after Tony Blair's New Labour government came to power. Despite the cynicism of Oxford's favourite miserablists, there was a sense of general optimism in the air. How things have changed. Their lyrics seem more prescient than ever given Gordon Brown's desperate attempt to rally the troops yesterday in Brighton. Although his speech was certainly defiant, the whiff of electioneering was overpowering.

Brown slammed the City as "ideologically bankrupt" in a speech strewn with rhetoric designed to appeal to Middle England and mobilise core support. His assertion that the credit crisis was a failure of rightwing Conservative ideology certainly left a bitter taste in the mouth. He claimed that "what let the world down" was "the Conservative idea that markets always self-correct but never self-destruct". He then blamed the "right-wing fundamentalism that says you just leave everything to the market and says that free markets should not just be free but values-free".

This element of his speech was, at best, what Hollywood might term a 're-imagining' of the current financial predicament and, at worst, a distortion of the truth. It takes a unique kind of amnesia to completely neglect "his own 10-year record as chancellor – when he championed City interests". After all, Brown is a man who had previously spent years advocating and championing a 'light touch' regulatory system and the notion that the market is a more efficient allocator of capital than the state. Robert Peston snappily articulated this state of affairs in his blog today – "Brown snubs Brown". He outlined that whilst the PM's comments were intended as an attack on the Tories, they really just "put the boot into the Brown years at Number 11".

To be fair, lots of people felt exactly the same way about the City during the economic boom, but for a PM who has demanded financial accountability, previously called for an end of the "age of irresponsibility", and even written a book looking at courage, he has probably emerged from this in a less than heroic light. That said, Sarah Brown felt otherwise as she exclaimed "My husband. My hero!"

A more profitable line of argument for the PM, and one which he developed in yesterday's speech, may be to attack the Conservatives over their lack of economic credibility. As today's Independent points out, "the Prime Minister did have a strong case to make about the hesitant and confused manner in which the Tories reacted to last year's global financial meltdown". In pursuing this line, he would, at least, put the onus back on David Cameron to explain how the Conservatives' calls over recent years for even-lighter-touch financial regulation would have helped to avert the crisis.

JS

"I'm not afraid of death. I just don't want to be there when it happens."

2009-09-24T11:17:00.001+01:00

Woody Allen can be relied on to reflect the concerns of many of us when it comes to death. He also said "I don't want to achieve immortality through my work. I want to achieve it by not dying."

According to claims made by American scientist Raymond_Kurzweil, 73-year old Mr Allen may yet just about get his wish. Writing in The Sun today, Mr Kurzweil (who, it should be noted, has a book to flog) suggests that the pace of developments in nanotechnology could mean man becoming immortal within 20 years.

This raises all kinds of intriguing questions – medical, philosophical and otherwise. On the face of it, you'd have to see this as a good news story – no more deaths from cancer or heart disease or whatever. But there are downsides. As Bryony Gordon writes in today's Telegraph, "I'm not convinced that I want to live forever. After all, how do you feel alive when you know that you're never going to die?"

And goodness only knows how Mr Kurzweil's prediction will impact on the pensions and insurance industries. Actuaries, pension managers and insurance providers have struggled with the implications of life expectancy increasing at the rate of two years every decade in the UK, let alone the concept of death becoming obsolete. What happens to everyone in the pensions and insurance industries if no-one dies? I suppose at least we'll all have plenty of time to re-train.

AF

DB or not DB? That isn't the question

2009-08-14T12:52:00.000+01:00

No great surprises in yesterday's report from KPMG, on the funding position of the top UK DB pension schemes, but interesting that they feel the "tipping point" has been reached, at which schemes are paying out more on retired scheme members' benefits than on current members' benefits. What's more, 22% of the top DB schemes "face no prospect of clearing pension deficits from discretionary cashflow over any reasonable time period" – a sobering thought given that cashflows are unlikely to improve in the foreseeable future.

The findings echo the views of senior figures in the pensions and investment industries revealed in a Penrose survey earlier this week, of whom 94% thought private sector DB schemes are "unsustainable" and would close to existing members for future accruals in the next couple of years.

With DB schemes seemingly being closed on a "weekly basis", the end of DB provision in the private sector looks to have been factored in by most commentators as pretty much a fait accompli. The debate instead is moving towards what will replace DB schemes. Here the picture is much less clear cut. Many fear employers will revert to DC schemes with contributions levelled down to the minimum prescribed under the Personal Accounts system. Others, such as Adrian Waddingham interviewed in FTfm this week, feel some will bring in some form of hybrid scheme, comprising elements of DB and DC.

The real "tipping point" in all this has more to do with the shift in the balance of risk between the employer and the individual. It's about the labour market and life expectancy. During the post-war period, when many of the DB schemes now facing closure were originally set up, there was a shortage of labour, so employers introduced final salary pensions as a way of attracting workers. Life expectancy for the average UK male was somewhere in the low seventies, so the cost of providing this benefit to people retiring at 65 was relatively low. Nowadays, with unemployment at 2.4 million and rising, employers don't need to go to such generous lengths to attract staff. And with life expectancy in the mid-eighties (and also rising), but retirement age still 65, the cost to employers is significantly greater. To put simply, if a trifle brutally: in 2009 can any rational employer justify offering a DB pension as an employee benefit? The answer, sadly, seems to be a resounding "No".

CM

Back to the bad old days?

2009-08-12T16:05:00.002+01:00

Today's UK unemployment figures make for grim reading. Nearly two and a half million Britons are out of work, the highest figure since the mid nineties, accounting for 7.8% of the workforce. What's more, the data emerges amidst dire warnings of continuing deterioration in the jobs market into 2010 and beyond.

For those of us old enough to remember the 1980's, when unemployment was well over 3 million, one of the striking differences between then and now is the relative scarcity of cultural references to the jobless. Where is today's television equivalent of Alan Bleasdale's Boys_from_the_Blackstuff? Who is recording the noughties versions of The Specials' Ghost Town or UB40's One in Ten? (Admittedly "One in Twelve point Eight" doesn't scan well, but you get my drift.)

Perhaps the cultural references will follow in due course, as the full impact of rising unemployment hits home. But a couple of other explanations occur to me. One is that however frightening redundancy is today, the modern labour market has changed beyond recognition in the last 25 years. Unemployment induced such despair in the 1980s because it affected millions of men (and it was mainly men) in traditional manufacturing industries who had assumed they were in jobs for life and saw no realistic alternative once those jobs disappeared. These days, there can be few people labouring (pardon the pun) under such illusions. Redundancy is still a nasty shock, but not necessarily a cause of despair.

It also occurs to me that some of the generation which grew up watching such TV programmes and listening to those records are now in senior enough positions to affect decisions about redundancy. They may be more inclined to look at freezing or cutting pay, or introducing part-time working as "least worst" alternatives to cutting jobs. Measures like these offer cold comfort to struggling families, of course. But it would be reassuring to think that the lasting impact of the work of Bleasdale and his contemporaries may have played some role in softening the impact of unemployment on today's workers.

AF

Explaining pensions in 140 characters or less

2009-07-23T11:13:00.000+01:00

Social networking site Twitter has yet another fan, this time in the form of Dawid Konotey-Ahulu, the founder of pensions adviser Redington. Konotey-Ahulu has urged the pensions industry to start using social media to share ideas. In an article called Telling It Like It Is; The New Reality, posted online today by Financial News, Konotey-Ahulu says the lack of blogs from pension fund officials and investment consultants is a 'crying shame'.

Konotey-Ahulu writes: "It strikes me that there are hundreds of participants in the pensions and insurance industry who could benefit from using social media platforms...I hear so much wisdom from that “crowd” on my travels and very little of it makes its way onto the stage."

However he admits that the Twitter interface, requiring updates to be confined to 140 characters put him off at first. It's a common complaint, but something that Konotey-Ahulu has since come to embrace as it requires 'Tweeters' to distil their complex ideas into easy-to-understand bite-size chunks. In his own words...
"There are thousands of ordinary individuals out there who, between them, sift through thousands of articles, have myriad conversations with other people, and assimilate acres of information. Then they choose the best of the lot. They pore over information, distill the very best (in their own view, admittedly) and then serve it up for you on the plate that is Twitter.

"If you happen to follow those individuals, you have access to their condensed and distilled wisdom. In other words, Twitter aggregates relevant, useful information for you on just about every topic - around the clock. The crucial difference between Twitter and Google, is that Twitter is unnervingly real time, in a very different way to a search engine. They’re calling Twitter the super fresh web."

Self-styled "Pensionsguru", Steve Bee, is similarly enthusiastic. The fact that his Twitter moniker was still available to him, despite his relatively late entry to the world of Twitter, is, he points out, instructive – it seems the pensions industry is somewhat behind the curve in embracing new forms of communication. But with the next generation of pension savers learning about personal finance through the national curriculum, and highly literate in social media, he argues, "our future legislators and civil servants will come into the workforce trained up on Twitter, too. That could bring enormous advantages with it to our future pension legislation."

The rate with which defined benefit pension schemes are being closed appears to have escalated from a drip-drip to a gushing torrent in recent weeks. It seems that firms are taking advantage of the announcements made by their peers to wheel out their own reforms. This pushes the design of defined contribution plans to the fore. If we are to avoid another pensions crisis we need to wake employees up to the fact that the responsibility for a comfortable retirement is now up to them. We need fresh ideas, and perhaps Konotey-Ahulu is right to point to social media as the best forum for sharing these.

Can you recommend any pension-focused social media sites? Let Penrose know at: lisah@penrose.co.uk

LH

Myners Retort

2009-07-17T14:27:00.002+01:00

Hedge funds have had a tough year so far but things could get far worse if the EU draft directive on alternative investment strategies gets underway. Most European based hedge funds houses' funds are offshore, with many domiciled in the Cayman islands. The directive does not permit these funds to be sold to EU investors, a development which would be massively detrimental to the hedge fund business model and could mean the closure of masses of hedge funds. With 72% of European hedge funds and fund of funds based in London it looks like the UK asset management industry has the most to lose if the directive is implemented.

But has the EU considered the effect this would have on the underlying investors? Perhaps not but City minister Lord Myners certainly has, as this week's press reports reveal. Myners has urged investors to protest again the directive – he says the directive would "reduce choice" by preventing investors from investing in alternative investment funds run by non-EU managers. More than 70% of hedge funds and 2% of private equity funds are managed outside the EU.

The National Association of Pension Finds and European Federation for Retirement Provision have supported Myners' concerns. Lindsay Tomlinson, the incoming chairman of the NAPF, said: "There have been few EU directives that look worrying, but one could understand what they were seeking to achieve and it was possible to focus on particular clauses and seek to make them work better for investors. This does not seem to be the case with the alternative investment fund managers directive, which if implemented as drafted, would have many consequences that in aggregate do not seem to benefit investors."

Myers has revealed that the UK is working on proposals to iron out "deficiencies " in the EU directive and has confirmed that the Treasury has established seven working groups comprising Treasury officials and industry experts, to retool the proposed rules.

What is clear is that a lot of work needs to be done in achieving a united consensus on this directive – watch this space.

NB

Lord of the Flies… 39 steps to enlightenment…?

2009-07-17T12:56:00.004+01:00

Commentators argue in today's papers that the situation in financial markets is the result of the lack of an effective governance framework. The current environment puts Penrose in mind of the William Golding novel, Lord of the Flies and its message that a lack of rules can lead to mayhem and disaster. This analogy leads us to Sir David Walker's report on financial sector corporate governance, released yesterday, which has prompted a savage response from the banking community.

Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today's FT, the chief executive of one investment bank said Sir David had caved into populist demands: 'What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?'

Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today's FT argues that this will not be effective: 'Risks should be managed by non-executives hour to hour, not by non-executives month to month,' he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David's recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.

Arguably the main aim of Sir David's report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board 'a less cosy, comfortable place'. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…

EV

Parental home is where the heart is - for 40% of young adults

2009-07-16T16:35:00.001+01:00

Yesterday's unemployment figures made grim reading, especially for young adults, one in five of whom are looking for jobs. A recent survey revealed a growing generation of "little SHIDs" ('Still at Home and In Debt'), with as many as 40% of 18-35 year olds either still living with their parents, or considering moving back home as a result of debt.

But is this surprising? With the increase in competition for graduate jobs, the pressure to keep up with mortgage and rental payments, the burden of debt repayment, coupled with a nagging feeling that they should be saving for the future, no wonder many young adults are finding themselves in this predicament.

The Government recently revealed that it is considering dropping tuition fees for students who stay at home to study, in return for waiving their rights to grants and loans. While this is presumably supposed to address the issue of increasing debt, one can't help but think that by shifting the financial responsibility to the parents of these university students, the next generation is not going to learn how to adequately plan for their future. Education is key, and both Government and the financial services industry have a responsibility to help people understand the importance of providing for the future.

ELS

Super-Calpers-go-ballistic-Ratings-are-atrocious

2009-07-16T12:20:00.001+01:00

Who rates the raters? Perhaps the state of California if Calpers has anything to do with proceedings. The largest public pension scheme in the US is suing the big three credit rating agencies for awarding AAA grades to securities that suffered enormous subprime losses. Suffice to say, given the size and power of the scheme – it manages a massive $173 billion of pensions after all – when Calpers sneezes, the world pays attention.

The suit filed against Moody's, Fitch and Standard & Poor's at the Superior Court in San Francisco, could be a watershed moment. The raters, although bloodied and their reputation in tatters, have at least managed to prevail against similar legal challenges before. However, they may meet their match squaring up against the pension giant famous for its shareholder activism.

The Calpers lawsuit alleges that "wildly inaccurate" Triple-A ratings of structured investment vehicles (SIVs) contributed to losses of over $1 billion. Nothing particularly new here, but what's interesting is their allegation that the rating agencies not only rated the SIVs, but also the securities that the vehicles purchased, to the extent that they provided guidance to the banks on what they needed to do to obtain the crucial AAA ratings. Here lies the rub, as Calpers' objection goes to the heart of the debate around the shadowy relationship between the financial engineers and those who rate their products.

Conflicts of interest is a phrase never far from the table as Calpers contends the SIV rating fees, which it says range from $300,000 to $1 million per deal, were reliant upon the successful sale of SIV securities. It doesn't take Columbo to read the subtext suggesting that there were arguably one million different reasons why the agencies would do everything in their power to ensure SIVs got top ratings. Dwight Cass of breakingviews adds an important note: "If they assisted in structuring the SIVs, that undermines the raters' assertion that their ratings constitute opinions worthy of the same First Amendment protections afforded journalists." Fitch's then-general counsel told lawmakers investigating the Enron debacle that a rating was 'the world's shortest editorial'. That pretence doesn't hold up when you're commenting on something you designed yourself."

The case highlights just how reliant investors are upon ratings agencies for their investment decisions, even highly sophisticated ones like Calpers. Worryingly, Calpers also claim that they didn't receive enough information from the SIVs or the raters to adequately understand the vehicles. Well, surely if you don't understand a product then you shouldn't really invest in it? Caveat emptor anyone? That said, Triple-A ratings are supposed to be as safe as houses – sorry, poor choice of words given subprime.

Ultimately, the entire financial services industry must take its share of the blame for the situation we find ourselves in – from asset managers, investors, and banks right through to the risk profession itself. The ratings agencies are easy scapegoats (incredibly easy, I'll give you that) and whilst concerns about their operation and conflicts of interest might be quite correct, it was not they alone that failed to spot the looming spectre of subprime. It's ironic that at a time where liquidity is in such short supply (unless you're Goldman Sachs of course), everyone has been so quick to pass the buck.

JS

Eeeh. Quality.

2009-07-15T15:22:00.001+01:00

Harriet Harman's latest initiative to outlaw discrimination against northerners is timely. Not because its' a good idea (it isn't), but because in these difficult times it brings some much-needed hilarity to national political debate.

I always assumed the Arts Council's failure to appoint me Chairman (sorry, Chairperson) was due to some kind of administrative oversight, so it tickles me to discover that it could actually all be down to the fact that I'm from Sheffield.

Equally cheering is this news, reported by the excellent Daily Mash. At last, some long overdue recognition for we downtrodden millions from north of the Trent.

Whatever else you may think of Ms Harman, you've got to admit she's doing her bit to put a smile back on the face of Britain.

AF

Pensions: Innovate or die

2009-07-15T11:55:00.001+01:00

Following yesterday's RSA Insurance Group deal with Goldman Sachs, it is evident that the pensions buyout market is back. Gone are the lacklustre days in which pension schemes shrank from the high costs associated with such deals: clearly there is money to be made by pensions buyout giants, such as Rothesay Life and Paternoster, and appetite from schemes as well. As Paul Trickett of Watson Wyatt said in today's FT: now that a few large funds have made the move, others are sure to follow.

As non-stop national press coverage makes clear, widening funding deficits, rising costs and increasing longevity make final salary pensions look more and more unsustainable. With an ever increasing number of DB scheme closures, it is clear that employers will do anything to get those pesky pensions liabilities off their balance sheets once and for all. Usually something has to give in such an arrangement: trustees and members are sacrificed for the greater good of the corporate giant. But in RSA's deal, trustees will maintain control of how the scheme's assets are invested. There is no disenfranchisement here: ownership and responsibility still rests with the trustees, while the corporate balance sheet is protected, at minimal costs. As Dow Jones points out, the reduction of the schemes' exposure to longevity, inflation and interest-rate risk and the high degree of security for the schemes are also key selling points of the deal.

Does this mean that the death of final salary pensions is not quite as near as we all had feared? Is there actually a wealth of options out there for pension schemes to pursue, perfectly designed and tailored to them? The Guardian brings us back to reality, reminding us that RSA has already closed its final salary scheme to new members and shifted current employees to a career average scheme. The pure DB pension scheme open to all members has one foot in the grave and is a thing of the past.

What insight does this deal leave us with, then? Surely it proves that in today's climate, pension schemes must innovate to survive at all, given the many economic, market and demographic woes it has to grapple with. RSA was smart enough to realise it needed something tailor-made to suit them—a simple buyout would not be sufficient. Many luminaries have cautioned that only the best fund managers will survive this crisis, citing Darwin's well-known thesis. Perhaps this should be extended to pension schemes as well—only those willing to innovate and re-invent themselves will endure.

CMM

The Ironic Chancellor

2009-07-08T12:35:00.001+01:00

Alistair Darling sets out the Government's latest ideas on bank regulation today, so will no doubt be all over the media for the next few hours.

The Chancellor always gives the impression of being a rather reluctant media figure. The furore around his interview with the Guardian last August probably didn't help. In a wide-ranging profile by Decca Aitkenhead, Mr Darling described the economic times as the worst for 60 years, attracting a barrage of criticism. But he turned out to be pretty much on the mark.

As an editorial in the same paper a couple of days later pointed out, the full Aitkenhead interview gave an insight into "a politician of unusual integrity, dry humour, and sober intelligence". Having worked with Mr Darling when he was Secretary of State for Social Security, I can only endorse that view. And whenever I speak to colleagues from that time, we all seem to agree that we find ourselves defending the Chancellor in similar terms whenever his name crops up amidst the current crisis. He is, we generally agree, a "top bloke".

So it was interesting to read these comments in Sunday's Observer from Matthew D'Ancona – not, one would have thought, instinctively a fan.

AF

Neither a borrower nor lender be?

2009-07-08T11:15:00.003+01:00

With the first day of the Ashes upon us, perhaps it's appropriate to begin with a cricketing analogy: the capital markets are like England fast-bowler Steve Harmison. No I don't mean that they're a lanky, Durham cricketer who continually fails to live up to his potential, but rather in the sense that they feed off confidence. With it, they both fly; without it, nothing functions properly. Investors, governments, corporates, regulators and all the other assortment of bodies that make up the financial market, are ultimately at the whim of something completely intangible – sentiment.

For people that spend most of their lives thinking in acronyms – NAV, LIBOR, EBITA, AUM – capital market participants can behave just like the rest of us and follow the herd rather than logic. For reasons that require no explanation, these players have generally been crestfallen, sometimes suicidal or simply lacking confidence for quite some time now. With that in mind, perhaps the rain that stopped play of late has abated, and everyone is ready to take the field again. Well, this would certainly be the impression if we look at the thorny subject of securitisation. There have been a number of editorial pieces this week suggesting that this art is showing signs of life.

How things change – just a few months ago for any banker to put his head above the parapet and proclaim the case for securitisation would have been castigated, such was the climate of hostility against the practise. Now we have both Goldman Sachs and Barclays Capital in the Financial Times discussing their new structural innovations – dubbed "insurance" and "smarter securitisation" respectively. However, it's important not to get ahead of ourselves, ultimately the markets for securitised loans are still very much frozen. That said, the "rocket scientists" who designed these complex instruments have not just been twiddling their thumbs. Financial engineering is alive.

The freeze in the securitisation markets has caused a dramatic shortage of lending power – $8,700bn of assets are currently funded by securitisation after all. Banks cannot possibly plug this gap with traditional lending, such is the regulatory pressure they're under to improve capital ratios. Some have suggested that this might be an opportune moment to bring back the bundling of loans into tradable securities. Many banks are petrified about lending, or constrained by their government owners and overseers to de-leverage their balance sheets. As George Hay of breakingviews explains: "If strong institutions can be found to take on the unwanted loans, everyone could be better off."

Despite the attempts to kick-start the securitisation markets, it doesn't look like we'll see a return of the incredibly complicated CDO squareds, CDO cubeds and the like anytime soon. These structures have been so discredited and investors so wary of them that they've become persona non grata. Even during the worst of the financial crisis, equities were always traded – unlike the highly complicated structured products which people wouldn't touch with a barge-pole. The CDO or CLO market dried up, even if they were fairly 'sound' – as market confidence dissipated, they simply became untradeable.

As the wheels of securitisation slowly start to move, regulators should (and will) keep a watchful eye on the process. Securitisation should theoretically help keep the financial system balanced by making it easier for banks to manage their balance sheets. However, in practise it became a tool for banks to hide leverage, moving the securitised loans off their balance sheets and into those infamous structured investment vehicles.

Risk and regulation are aspects of the new financial order that nobody can deny. It's become a matter of political expediency as well as economic necessity. Although not every attempt to regulate will pass through, I think we all know that financial institutions are going to face more regulation and supervision rather than less. Investors will also demand far more transparency. While it was okay to push on without question while the going was good and returns delivered, the world is just not like that anymore.

The interest of parties must be more closely aligned and this is why the European Commission is demanding that rating agencies and bankers disclose more information about deals. As the FT reports, banks may well face calls to keep 5 per cent of any securitised bonds that they arrange, so they have enough "skin in the game" to monitor credit risks properly. The direct link between borrowers and lenders must be preserved if this market is to stand any chance of real recovery. Accountability, transparency and good governance are going to be bywords going forward.

The Guardian's Elena Moya contends that Goldman Sachs's and BarCap's securitisation initiatives represent a "sign that the City is returning to pre-credit crunch levels of confidence." That may well be overstating the case, as the market is still far from out of the woods, but it's telling that a practise so criticised for triggering the financial crisis is taking a few tentative steps into the open. Perhaps the rain has stopped and the players are now looking to take guard. They'll need to play with a straight bat though.

JS

Crime of the century (and a half)

2009-07-01T10:42:00.001+01:00

I have been somewhat shocked by the recent Madoff ruling on two fronts. Firstly, according to some sources the average incarceration for murder convictions in the US is around 22 years. Are we saying that Madoff's behaviour is seven times as evil? And secondly, does the US really need to pass ridiculously long sentences that don't even reflect reality (do many 71 year old men live another 150 years?......Yes quite).

By no means am I saying that Madoff doesn't deserve to be punished for his crimes. He has ruined the lives of many people who had faith in his investment strategies and who had trusted him with their life savings. But to put him in the same or worse bracket as a murderer is disproportionate to his crime.

The US courts are fond of handing out harsh sentences and Madoff's sentence is not the longest for a white collar criminal. This was awarded to Sholam_Weiss who was sentenced in Feb 2000 to 845 years in prison for his plot to defraud an insurance company costing many of its 25,000 customers their life savings. Does that not seem a little extreme? Clearly there is no chance in hell these men will get out of jail alive. It's one thing to advocate life to mean life for murder sentences, but shouldn't the same apply for financial crimes?

LL

Investors' hopes for retailer therapy

2009-06-25T11:00:00.001+01:00

Following on from our last blog update about public sector pensions, today's papers make much of the latest controversy around MPs' pensions. Frankly, even I'm struggling to come up with a defence for providing such a generous scheme at the taxpayers' expense, and Ros Altmann explains more eloquently than I why MPs' pension arrangements elicit such rancour.

One area in which pension funds, and other investors, are likely to assume a higher profile in the coming days is over the trouble brewing at Marks & Spencer, ahead of the company's AGM in a couple of weeks' time. As Richard Fletcher points out in today's Telegraph the M&S boardroom has resembled a soap opera in recent times. The latest cliffhanger surrounds growing shareholder pressure on Sir Stuart Rose to relinquish his executive chairmanship, which runs counter to best practice as set out in the Combined Code on corporate governance. According to corporate governance advisers PIRC, Sir Stuart's role is "a significant breach" of the Code, which seeks to guide companies on how best to run themselves in accordance with principles agreed by shareholders and directors, and which advocates the separation of roles of Chairman and Chief Executive, mainly to avoid the concentration of power in one pair of hands.

The Financial Reporting Council is currently consulting on potential changes to the code, and among the long list of names who have responded to the consultation is a certain leading High Street retailer. Among other points raised in Marks & Spencer's response is the suggestion that it would be "helpful to differentiate between the roles of chairman and chief executive being combined and the chief executive stepping up to be chairman". A point which corporate governance advisers such as PIRC would presumably endorse.

AF

Public sector pensions

2009-06-04T15:50:00.004+01:00

4 June 2009
Changes to Defined Benefit pension schemes run by BP and Barclays have hit the headlines this week. They're widely acknowledged to be setting the trend for further announcements in the coming weeks by other blue chip employers faced with similarly daunting pension liabilities.

One side-effect of these announcements is likely to be renewed media interest in the sustainability of DB pensions in the public sector. As one City editor writes today, "this week's actions by Barclays and BP emphasise the need for the next government – in the interests of fairness – to confront the huge taxpayer cost of public sector pensions."

If I had a pound for every time the press used the term "gold-plated" in relation to public sector pensions, I could probably retire tomorrow.

Tragically, I've been unable to negotiate such an arrangement. Twelve years of working for various government departments in the 1980s and '90s, however, mean I am a deferred member of the civil service pension scheme. This means that in 2024, taxpayers (including millions of public sector workers) will have to pay me a lump sum of about £12,000, and then about £4,000 a year until my death (which, on these figures, is more likely to be caused by hypothermia than choking on fois gras). These may or may not be typical numbers, but certainly very few people will be taking Goodwinian sums from public sector pension schemes.

So, in anticipation of the wave of opprobrium about to descend on my fellow public sector pension scheme members, I'd urge you to consider this thought provoking analysis. And to bear in mind that a critical proportion of the electorate are either active or deferred members of public sector schemes.

AF

And the prize for "Most Blindingly Obvious Survey Results" goes to...

2009-05-29T12:18:00.001+01:00

29 May 2009

…the Office for National Statistics (ONS), whose new report on Pension Trends reveals that "employees on low earnings are less likely to belong to pension schemes than higher-paid employees". It seems only 21% of men and 32% of women earning less than £300 a week are members of employers' pension schemes. The only surprise here is that those numbers are as high as they are.

Earlier this week, a BBC report found that half of UK adults between 20 and 60 are not saving into a pension. Again, maybe not surprising.

The numbers do, though, provide a useful indication of the importance of the new Personal Accounts system, due to be up and running in 2012. Regardless of the ongoing woes of workplace pension providers, pension deficits and demographic time bombs, it's worth remembering that Personal Accounts are probably the last chance to provide much needed additional retirement income for millions of people on middle and low incomes, and to avoid that burden falling entirely on taxpayers of the future. Who, let's face it, will have enough on their plates after recent developments in the public finances.

Tom Stevenson, writing in the Telegraph earlier this week , invoked Goethe, no less, in addressing this issue: "whatever you can do, or dream you can, begin it".

AF

The Times They Are Exchanging

2009-05-22T10:48:00.001+01:00

21 May 2009

"Regrets I have a few, but then again, too few to mention,
I did what I had to do, and saw it thru' without exception,
I planned each chartered course, Each careful step along the by-way.
And more, much more than this, I did it my way."

So it's farewell to the "iron-lady" of Paternoster Square, as Dame Clare Furse yesterday stepped down as chief executive of the London Stock Exchange after eight years in the hot-seat. More Sinatra than Piaf, Dame Clara did concede that she had a few regrets. However, as always, she was resolute in her defence about fighting off the five takeover approaches during her tenure.

Never loved but always respected, financial commentators have treated the exit of "Queen Clara" with more affection than resentment. Platitudes aside, it's always been accepted that the worth of a CEO must be judged by whether they leave their company in a better state than they found it. Jeremy Warner in The Independent said that this question could be answered strongly in the affirmative.

Still, Dame Clara has left a mixed legacy and despite her vigorous refusal to sell the family silver and taking the LSE's share price to just short of £20, she exits the borse with shares trading at 689p and the institution lying sadly outside the FTSE 100. Perhaps the real black mark against her name was not snapping up Liffe, the financial futures market, back in 2001 – suffering the indignity of rival Euronext pinching it from beneath her nose and leaving the LSE without a world-class and highly lucrative derivatives operation.

Our attention now turns to Xavier Rolet, the great white hope, who takes over from Dame Clara with a strong reputation and genuine understanding of the LSE's machinations given his previous position at Lehmans – formerly the exchange's biggest client. Some have suggested that he's taking over at the perfect time, reaping the rewards if a recovery takes hold.

However, to affect such a change, a real evolution will be required. The European trading landscape has been transformed since the MiFID reforms of 2007. The market is increasingly fragmented and the traditional hegemony enjoyed by market stalwarts like the LSE is being increasingly challenged by multi-lateral trading platforms such as Chi-X and Turquoise. The LSE has also been slow to react to the threat posed by dark pools, which provide liquidity not displayed on order books, allowing traders to move large amounts of shares without revealing themselves to the market.

So Monsieur Rolet, to persist with the protracted musical motif, some advice below:

"You better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'"

JS

Investors Reluctant to Shell Out for Under-Performing Execs

2009-05-22T10:45:00.000+01:00

20 May 2009

Earlier this year, there was much speculation about whether the recession would mean more active shareholder engagement with the companies they invest in. The Investment Management Association seems to think so.

And Shell executives were yesterday given an emphatic reminder of this issue, when 59% of shareholders voted against the company's remuneration policy.

Commentators have drawn parallels with a similar vote at GSK six years ago. At that time, new legislation had compelled UK listed companies to put their pay arrangements to an advisory shareholder vote for the first time. Many, it seemed, were caught unawares. Shareholders, represented by groups such as the National Association of Pension Funds, made clear their intention to hold executives to account over what were seen as excessive rewards for poor performances. The arguments set out by the then NAPF Chief Executive, Christine Farnish, will still resonate with investors in today's troubled markets.

The Shell vote suggests that the lessons of six years ago have not yet been learned. So what next? Perhaps, as Nils Pratley argues in the Guardian today, shareholder votes on remuneration issues should be made more than just "advisory"?

Getting the work/death balance right

2009-05-22T10:44:00.000+01:00

7 May 2009

Yesterday's paper from the National Institute of Economic and Social research, suggesting the projected explosion in government debt could be addressed by raising the state retirement age, resulted in a flurry of predictable "Work 'Til You Drop" headlines.

To those of us who view the current retirement age of 65 as soul-crushingly distant, such headlines might induce despair. But as the BBC's Economics Editor, Stephanie Flanders, points out, "there are no good options for cutting government debt, but extending all of our working lives could be the best of a bad lot". The NIESR reckons that extending our collective working lives by just one year would reduce the national debt by 20% of GDP over 30 years. Put in those terms, raising the pension age begins to look like an increasingly attractive option for a cash-strapped Exchequer.

Hefty increases to the state pension age have already been factored into existing legislation. The pension age for women will increase from 60 to 65 over the next 10 years, and there will be a further increase for everyone, from 65 to 68, between 2023 and 2046.

Back in 2002, the former Minister for Welfare Reform, Frank Field, pointed out that if the average length of retirement when the current state pension was introduced in 1948 had been maintained, the state pension age would now be over 74. Around the same time, the then Secretary of State for Work and Pensions, one Alistair Darling, was warning that growing life expectancy was placing an intolerable strain on the pension system. It was not feasible, he pointed out, for a forty year working life to provide enough cash to sustain someone through a retirement of thirty years or more.

Mr Darling may draw some comfort from the findings of Cambridge University geneticist, Aubrey De Grey. He's perhaps at the slightly wacky end of the spectrum, but if he's right, even raising the retirement age to 100 would leave some of us enjoying 900 years of retirement. Presumably he's ploughing his savings into manufacturers of colostomy bags and walk-in showers as we speak…

In Cod We Trust

2009-05-22T10:43:00.000+01:00

5 May 2009

The Bank of England is, it seems, hoping to learn something from the animal kingdom and other non-financial structures about how better to run the financial sector.

Gillian Tett, in the FT this weekend, reports that Mervyn King and his colleagues have been brainstorming with Lord Robert May, eminent zoologist and former head of the Royal Society, about whether the actions of the financial services industry can be predicted or controlled in the light of what we know about animal behaviour or environmental systems.

A paper co-authored by Lord May last year suggested that risk management in the financial sector is analogous to fisheries management. This latter has tended to focus on management of single species (for the financial sector, read individual banks, say), but the current trend is to regard such analysis as incomplete, and that "the wider ecosystem and environmental context (by analogy, the full banking and market system) are required for informed decision-making".
If this sounds fishy to you, it's worth looking at related findings in a paper just published by the Bank's Executive Director of Financial Stability, Andrew Haldane. This notes that, "however sensible structuring of credit may have seemed for individual firms, it is difficult to conceive of a network which could have been less structurally robust. Darwinian evolution is currently in the process of naturally deselecting CDOs. But there is a strong public policy case for the authorities intervening more aggressively when next financial innovation spawns species with undesirable physiological features."

Another striking analogy with the natural world is used in an Ftfm article this week, to demonstrate that "what may be good from an individual investor's point of view is not necessarily in the interests of the investment community as a whole".

What next in the apparently ever more closely linked worlds of finance and nature? Hedgehog fund managers? Primate equity?

Maybe we should just be grateful for a bull market…

Death and Taxes

2009-05-22T10:42:00.000+01:00

29 April 2009

The proposal to impose a tax rate of up to 30% on pension contributions for higher earners seems unlikely to prompt a resurgence in Government popularity. Indeed, the Government's own online pensions page makes no mention of the proposal.

To be fair, HMG has said it will consult on the idea, so the plans are not necessarily set in stone. But reaction so far has been colder than a witch's nipple. Apart from the impact on the pockets of the wealthy pension saver, (such as your average national newspaper editor), the pension industry is up in arms about the flagrant contradiction of a longstanding tenet of UK pension design – namely that, unlike many regimes elsewhere in Europe, UK pension contributions are tax exempt, as are investment returns, but pensions in payment are subject to income tax. Any change is bound to be seen with, at best, concern and, at worst, horror, by the UK pensions industry.

So, partly in a no doubt vain attempt to add an element of balance to the debate, but mainly just to be contrary, can I recommend this interesting, if rather technical, OECD paper from 2001? It suggests that the pre-paid tax model has a number of features to recommend it – notably that it brings forward the taxation income deferred under the present system, reduces the scope for tax evasion by collecting the money up front, and raises more revenue from those who are higher rate tax payers in their working lives but revert to basic rate tax in retirement.

Politically, there is a fascinating parallel with the political debate in 1997, when the soon-to-be-ousted Conservative administration proposed something similar through its Basic Pensions Plus idea, to the scorn of the then opposition.

Non-Execs please, We're British

2009-05-22T10:41:00.000+01:00

27 April 2009

A feature of this recession has been the ongoing debate over who's to blame. In this context, a variety of culprits have been cited. The regulator blames institutional investors. Sections of the media blame the regulator. The Daily Mail blames Gordon Brown. Some, it seems, are even blaming the PR industry.

In view of all this, it's interesting to note the results of a Newsweek poll which reveals 85% of respondents place some blame at the door of the banks, while 73% allocate some blame to the Fed. Perhaps the most interesting thing about this poll, however, is the date – January 1991.
One group who seem to have emerged relatively unscathed from the blame game so far are non-executive directors. It's only seven years since former Tory Trade and Industry Secretary, Lord Young of Graffham, raised eyebrows by calling for the scrapping of non-executive directors. As a parting shot from his then role as president of the Institute of Directors, Lord Young argued that unless directors could get to know a business as well as executive directors, "why bother?"

Derek Higgs, who was subsequently charged with producing a report on the role and effectiveness of non-executive directors, offered a rather more positive vision, and proposed a more important role for them in ensuring the interests of investors were properly represented at board level.

Perhaps it's telling, then, that six years on from the Higgs review, this week's FTfm features a piece from ICSA policy director David Wilson, which identifies the banking crisis with "a colossal failure of corporate governance", and, in an echo of Sir Derek's original report, calls for greater courage and understanding from non-execs.