Wednesday 30 May 2007

Standard Life fat cats

The first "fat cat" demo at an AGM I can remember for quite a while. This time is was the Amicus bit of Unite having a pop at recently-floated Standard Life for embracing the rewards of public listing whilst cutting the pensions of employees in the company. Plenty of coverage yesterday in the Grauniad, Times, Scotsman and so on.

More final salary closure to come say actuaries

From the Professional Pensions site -

FINAL salary schemes will be hit with a second wave of closures to new entrants and future accruals, the Association of Consulting Actuaries warn.

The trade body’s chairman Ian Farr said new style shared risk schemes are the future of occupational pensions in the UK urged the government to legislate quickly for the new “third regime”.

He said: “We need a new vision for the future of occupational pensions in this country. From employers that we are advising, we know there is a second wave of closures to future accruals coming.

”Most schemes will be replaced by defined contribution arrangements. Our concerns about these schemes is how they apply to moderate earners - the volatility of return from DC is at issue.

“Risk sharing schemes can offer the ‘safety valve’ to provide the degree of cost and benefit predictability that employers need, while providing members with a more stable pension than DC.”

Hewitt actuary Richard Mulcahy said a new model must address the reality that employers only want to be exposed to a limited amount of risk.

”Indexation, both pre and post retirement needs to be in place. It does not give absolute certainty that everyone would like but it is a compromise necessary to limit costs that companies will accept,” he said.

Members of a shared risk scheme would remain contracted in to give a guaranteed layer of DB. The employer would determine the accrual rate based on pay in a year.

The employer would control expected cost of future service accruals using “prudent assumptions”. Employees would be guaranteed the value of their benefit will at least exceed the value of heir contributions.

Farr and Mulcahy said it was essential legislative changes were made to accommodate the shared risk schemes and said the current government deregulatory review should be addressing this.

Mulcahy said risk sharing would also allow mid to large sized employers control over their potential section 75 debt and could lead to lower Pension Protection Fund levies.

Farr said: “This isn’t pie in the sky – shared risk type schemes must more common than DC in the Netherlands. Many companies do not want to shift 100pc of the risk on to employees.

”We need to embrace indexation. We need to get people excited about occupational schemes in this country. Simplifying legislation will allow us to move forward to sharing risk between members and employers. This is a once in a generation opportunity.”

GMB urges Boots trustees to take a tough line

An interesting intervention from the GMB in the Boots private equity buyout story. It doesn't immediately appear that the GMB is actually calling for anything more than the trustees were already doing (although I need to go back and check if the £1bn being knocked about relates to funding the scheme on a buyout basis). It's interesting that quotes don't come from the pensions bods at the GMB too. It all suggests that the unions are well aware of the role the pension funds could/should play in buyout activity. Which is definitely a good thing.

The GMB is also putting something out next week -

GMB's Congress next week will consider a report on the extent to which private equity companies are linked to insolvent pension funds with massive unfunded liabilities which were passed over to the tax payer and other pension funds to make up.

IUF guide to private equity

Finally, a link to the IUF doc A Workers' Guide to Private Equity.

Here's the blurb from the IUF's buyout-watch site:

New IUF Publication: A Workers' Guide to Private Equity Buyouts
The IUF first drew the attention of the international trade union movement to the growing scale of private equity buyouts in the context of the "financialization" of corporate investment to deliver maximum short term financial returns to shareowners. The secretariat has briefed UK and European parliamentarians on the threat of private equity, established a unique website on private equity in the IUF and other sectors (www.buyoutwatchinfo) and assisted affiliates in responding to private equity buyouts.

The secretariat has now published a A Workers' Guide to Private Equity, a 36 page A5 brochure, aimed at IUF affiliates and trade unions and their members around the world. Available in English, and shortly in French, German, Spanish and Swedish, the publication sets out in accessible language what private equity is, how it operates and the dangers it represents to workers and unions. It points to possible strategies in bargaining with the private equity funds who are becoming increasingly significant players as owners and employers in many IUF sectors. It explains how a specific political environment (deregulation) has made it possible for the funds to expand globally, and how political action can contain the funds.

Single copies of the brochure are CHF 5 per copy, plus postal charges (CHF 6.20 for Europe, CHF 8.50 for the rest of the world, for a total of CHF 11.20 for Europe and CHF 13.50 for the rest of the world).

Bulk copies of the brochure are available from the secretariat for CHF 3 per copy for orders of ten or more, plus postage. Bulk orders may be purchased by direct bank transfer, or we can invoice via paypal for secure online payment with a credit card. For more information, contact the secretariat at

Monday 28 May 2007

More US union voting research

The US unions were the first ones to start scrutinising how fund managers exercise their shareholder voting rights. Initially this was via the AFL-CIO's Key Votes Survey. But since mandatory voting disclosure for mutula funds was introduced the reports have become more specialised. See for example this report on exec pay votes by AFSMCE. Now the Change To Win Investment Group (the activist investor arm of the splinter union fed in the US) has produced a similar report. Click on the link that reads 'Rubberstamping the Agents of Excess' on their front page.

Private equity prepares its defence

From Today's Telegraph

The British private equity industry is preparing to take the stand to mount a defence against its detractors as the Treasury Select Committee publishes the full agenda for its inquiry into the sector.

The giants of the industry - including Blackstone and KKR - are set to go head-to-head with unionists including the GMB and Unite in front of the committee, which is chaired by veteran Labour MP John McFall. The inquiry follows months of claims by trade unions and Labour politicians that the private equity industry cuts jobs and benefits from tax breaks.

The committee's decision to hold the inquiry was announced in March, after almost six weeks of constant claim and counter-claim by the two sides.

As part of its terms of reference, the committee said it is particularly interested in discussing the regulatory environment surrounding private equity funds, taxation, and the economic context in which the industry operates. Interested parties were asked to submit filings ahead of a May 9 deadline to help the committee's understanding of the key issues.

But the release of the full timetable for the three-day inquiry highlights that the approach is a very open. As well as the obvious private equity houses that will be asked questions, the committee has asked not only TUC general secretary Brendan Barber to attend, but representatives from both the GMB and Unite unions.

Industry body the British Venture Capital Association (BVCA) will also attend, as will a financial markets group of the London Stock Exchange, the Association of Investment Companies, the Association of British Insurers and the CBI.

The sessions are likely to be the first time that the industry learns of the initial thoughts of Sir David Walker - who is chairing an industry committee to look into transparency and disclosure and who is due to attend on the final day. The sessions begin on June 12, with the second and third sessions taking place at Portcullis House on June 20 and July 3.

Wednesday 23 May 2007

A view from the industry - 2

I'll post about something other than private equity soon, honest. But this bit from the Telegraph over the weekend is worth a read. Again it's from someone within the industry so it has some interesting perspectives. He is very scepital of the value of much reporting by public companies. Also he says that the big private equity firms are evolving into multi-asset firms, whilst other investors are starting to steal the private equity industry's tricks. Interesting.

TUC calls for private equity reforms

From the TUC site today -

TUC challenges ministers on private equity

The TUC is calling on the Government today (Wednesday) to introduce a comprehensive set of measures to deal with threats to the economy and workforce from the growth of private equity funded takeovers.

In its submission to the Treasury Select Committee, the TUC says that ministers should:

*end the favourable treatment enjoyed by private equity takeovers by introducing new disclosure requirements for private equity owners;

*introduce new requirements to inform and consult the workforce in companies subject to private takeovers;

*introduce new protection for the terms and conditions of employees in takeover targets;

*investigate whether tax relief should end on loans used for company takeovers; and,

*ensure that private equity partners pay proper income tax on their earnings.

The growth of private equity has wider economic implications, the TUC says. There needs to be an investigation of whether the growth of highly leveraged buy-outs is building up a speculative bubble that, if it bursts, would leave employees as the main losers.

The rise of private equity is reducing the size of the stock market, the submission says, as private equity takeovers have risen from 9 per cent of all deals to 25 per cent in nine years, with UK equity market capitalisation falling by nearly £50 billion in the first half of last year. This could result in a dangerous reduction in the liquidity of capital, the report warns.

This reduces investment opportunities open to pension funds and other investors, and means that an increasing proportion of the wealth generated by UK companies is not available to pay pensions either today or in the future. Instead profits are going into the pockets of a handful of super-rich private equity partners who receive specially favourable tax treatment.

The TUC says the Government should close the tax loophole that exempts private equity firms from rules that require employees to declare shares received as part of their pay package as income. 'Treating carried interest as capital gains rather than income for tax purposes is an anomaly that is extremely unfair to the very many people on far lower incomes who pay much higher levels of tax', the report says.

There should also be an investigation of the potential for conflicts of interest in private equity takeovers. These start with a potential conflict between the directors of takeover targets who may be offered highly lucrative stakes by the new owners and other existing shareholders. And after any takeover there are potential conflicts between the long-term interests of the company and the new fund manager owners. New laws and regulations are required to end these conflicts of interest, the TUC says.

Speaking at the Congress of the European TUC in Seville, TUC General Secretary Brendan Barber said: 'It's time for action on private equity. The rise of super-rich private equity players is beginning to fundamentally change the nature of British and European capitalism. We need a Europe-wide campaign led by unions to secure proper rules at both European and national levels.

'A new super-rich elite can suck value out of companies without even paying proper UK tax on their windfalls or disclosing what they are doing. Meanwhile the rest of us face possible reduced returns on our pension investments, the risk of economic slowdown if the takeover debt bubble bursts, and - if we are unlucky enough to work for a takeover target - real threats to jobs, pensions and living standards.'

'The Government cannot just sit back worried that action might make it appear anti-business. Taking action on private equity would be pro all the businesses that think long term, have to fully report what they do and whose owners pay proper tax on their investments.'

Tuesday 22 May 2007

Labour's Poll Tax. Again.

I was amused to see today that road tolls are being talked up as "Labour's Poll Tax". I thought I had heard this phrase used before, so I thought I would I would Google it to see how many issues it has been applied to. The attacks below come from the Left and the Right, although the Torygraph features several times!


Road pricing.

Heathrow Terminal 5.

NHS 'privatisation'.

Foundation hospitals.

Top-up fees.

ID cards.

The pensions crisis.

Council tax rises.

The fox hunting ban

And, of course, Iraq.

High chief exec turnover - is it a good thing?

There's an interesting report out from consultants Booz Allen Hamilton looking at how long CEOs stay in post for. The report says that turnover is at a high, including examples where CEOs are booted for poor performance.

The somewhat bizarre conclusion drawn is that the high turnover shows that governance reform is working, as board respond to shareholder and regulatory intervention to dump underperforming CEOs. I have a few problems with this. First, if more CEOs are getting the boot doesn't that imply that boards aren't picking the right people? Second, it reinforces the myth (in my opinion) of the superstar CEO. Just as I don't believe one individual can ever be responsible for all the success of an organisation, neither can they be responsible for all its ills. Finally, I have a real problem with the implication that these findings prove that a market is at work.

On the other hand the report does say that outside CEO appointments often fail to deliver, particularly of they come from a different industry, or a company with different problems. I think the cortrect reponse here is.... well, duh!

Anyway, where are some headline findings:

Key Study Findings

CEOs are as likely to leave prematurely as to retire normally. Continuing a pattern from 2004, in 2005 nearly half of all CEO departures were due to poor performance or mergers.

“Repeat chiefs” are increasingly common. More than one in eight of the CEOs who left office this year had previously served as leader of another company; increasingly, active CEOs are moving directly from one large company to another.

But “repeat chiefs” perform no better than new, untested CEOs. This pattern has been the same in seven of the eight years Booz Allen has studied. “The challenge of leading an unfamiliar organization evidently more than offsets the benefits of having led a publicly traded company in the past,” said Kocourek.

Outsider CEOs flame, then fizzle. During their first two years in office, CEOs brought in from outside the company produce returns for investors that are nearly four times better than those achieved by insiders. But when the tenure grows longer, insider CEOs tend to do much better. “Companies that hire outsiders should follow a ‘five-year rule,’ seeking a new CEO before performance declines,” said Kocourek.

Hiring outsider CEOs often backfires for troubled companies. Looking back at the careers of the “class of 2005,” those who had been hired from the outside had taken charge of companies with, on average, far worse performance records than those who had been promoted from within. In North America, for example, 29% of troubled companies had hired an outsider in the prior two years, compared with only 6% of companies with positive performance records.

Nonchairman CEOs are now the best performers. Of CEOs who left office in 2005, those who never served as chairman of their companies outperformed those who served in the dual role of chairman and chief. In North America over the last three years, departing nonchairman CEOs had produced shareholder returns three times as high as those of CEO/chairmen.

The former CEO should not remain as chairman. CEOs who serve in the “apprenticeship model,” in which the chairman is their predecessor, generally do poorly. For example, in Europe over the last four years, “apprentice” CEOs produced annual shareholder returns five percentage points lower than the returns achieved by departing CEOs who had the advantage of working with a separate and independent chairman.

Monday 21 May 2007

Pension schemes back in surplus?

According to Professional Pensions, a report from one of the leading actuarial/investment consultants suggests that, in aggregate, the UK's biggest pension schemes are now in surplus, as measured on an FRS-17 basis. I find this a bit hard to believe. I was talking to a trustee of a very large scheme the other day and he was very clear that they were still in deficit, and I don't think he will be alone amongst the bigger schemes. Maybe its the FRS-17 basis that does it?

In any case it might not be a good thing for scheme members. It might lead some employers to close schemes altogether in order to lock down the costs. One to keep an eye on definitely.

So much for venture capital

Further evidence of the dominance of buyout activity within the private equity industry - Apax Partners is reportedly giving up on the venture end of the market. It does seem the company will continue to have some involvement in expansion stage, as the FT talks about growth capital, but it does underline where the industry is headed.

Apax Partners has abandoned the venture capital end of the private equity market on which it was founded as it attempts to raise a record amount for a European buy-out fund of as much as €11.17bn ($15bn).

The move underlines the parlous state of the European venture capital market, one of the worst-performing parts of the global private equity market that encompasses buy-outs, mid-market deals and growth capital.

Sir Ronald Cohen, the Apax founder who quit in 2003, has been a staunch supporter of European venture capital. With the industry facing unprecedented political scrutiny after a series of controversial deals, Apax’s move could spark concern over the fate of venture capital, often portrayed as the acceptable face of private equity.

Sir Ronald, a leading Labour party donor, is likely to be dismayed by Apax’s decision. However, the firm, now run by chief executive Martin Halusa, has its sights set on becoming one of Europe’s three biggest firms in the global buy-out market.

Apax will this week contact investors to request formally lifting the maximum it can raise for its latest buy-out fund from €10bn to €11bn. With additional contributions from Apax partners of as much as €165m, that would lift the total to €11.17bn – just €70m more than arch rival Permira’s €11.1bn record fund.

Apax declined to comment and the fund is not guaranteed to raise its top estimate.

Replacing Permira as Europe’s biggest buy-out group may step up the level of public notoriety directed at Apax. Permira has suffered unwelcome publicity on deals such as its buy-out of the AA, the motoring organisation.

However, the record European fund-raising underlines investor appetite for private equity at a time when the industry is completing record numbers of deals.

Elsewhere the FT also highlights an OECD report which argues that monetary policy in Japan and China is a major factor behind the buyout boom.

Sunday 20 May 2007

No firms safe from private equity

From today's Observer, I'll try and track down the IUF report:

Private equity funds last year went on an unprecedented $725bn (£367bn) global buying spree - a figure outstripping the entire economy of the Netherlands.

Figures out next week estimate that buyout funds, which have cut a swathe through global businesses and now employ over a fifth of employees in Britain's private sector, can draw on a war chest of $2 trillion to fund acquisitions - enough to buy McDonald's 38 times.

Leading the assault is the Carlyle Group, led by Louis V Gerstner, which last year spent $32.5bn on target companies.

The figures are contained in a new report by the IUF, an international union representing food, farm and hotel workers worldwide, who say that no worker is safe from the buyout firms.

The IUF says loading companies with debt means they pay less tax, which places an increased burden on individual taxpayers and smaller firms. They claim that research and development budgets of firms under private equity ownership are slashed so they rarely yield product innovations.

The Workers Guide to Private Equity Buyouts is an analysis of the impact of the sector on investment, company performance, research and development and the future of world economies including the UK. 'What is the future of the UK economy in the face of this assault?' said Peter Rossman, a joint author of the report.

Economic stability was coming under renewed focus as central bankers warned this weekend that highly leveraged hedge funds were creating a risk to the global financial system. A report presented to G7 finance ministers by the financial stability forum yesterday suggested the proliferation of complex debt instruments, such as credit derivatives, meant a number of major banks could leave themselves dangerously exposed.

Svein Andresen, the forum's director-general, said some banks had relaxed their lending standards in a dash to win a share of the hedge fund market.

Thursday 17 May 2007

The Labour leadership election is a one horse race - so what?

Thought I'd chip into the debate about Labour's leadership election. Personally I sort of bought the argument that a contest would be a good thing - primarily to re-assert Brown's authority and legitimacy. However I am not at all fussed that it hasn't panned out that way.

It was very clear from the outset that a Left challenger would struggle to get nominations, and would have no chance of actually winning. Therefore I think the amnount of effort put into trying to get such a campaign off the ground was a bit of a waste of time and I'm glad the big unions didn't get involved. I don't at all accept the view that Brown is a terrible right-winger, carrying on Blair's mission to destroy Labour/socialism from within. But then I don't subscribe to the conspiracy theory view of politics.

Anyone who genuinely thinks that Labour needs a major tilt to the Left should go and have a proper look at the recent election results. Public-friendly Nu Labor got barely a quarter of the vote. The 57 varieties of non-Labour lefties got pathetic amounts of votes and were wiped out politically in Scotland. However much we might not like the reality, the public do not want a full-blooded old-style socialiast government.

Many Labour and union activists claim in response that they know lots of people who want a proper Left alterantive - but to what extent to they engage with non-political members of the public that any democratic movement needs to win over in order to win power? Look at the facts - the public does not vote for parties further to the Left of Labour.

Finally you have to wonder at the motivations as people on the Left who spend years telling union members and Labour activists that the party (and sympathetic union leaders) are selling them down the river. Come election time these same people, grudgingly, tell the punters to vote Labour and then wonder why there is apathy.


EAI says research into M&A activity is lacking

Interesting bit in today's Professional Pensions (oh how I dreamt of saying those words when I was 21) about the lack of analysts research into merger and acquisition activity. I'll post the article below and try and track down the actual report. Given that evidence, even from consultants who may have an interest in M&A taking place, suggests many (if not most) deals are value destroying, it is surprising that institutions generally just nod them through. I've always thought this is very fertile territory for the Left - this is a real-life example where our interests as working people and investors coincide.

Anyhow here's the article:

EAI study finds research into M&A too low

by Jonathan Stapleton 16-05-2007

THE ENHANCED Analytics Initiative has released summary findings of a study on mergers and acquisitions research.

EAI – an international group of asset managers, pension schemes and other investors – aims to encourage investment research that considers the impact of extra-financial issues on long-term company performance.

The study, produced for the EAI by investment consultancy onValues, found the overall volume of enhanced M&A research was low – and noted that, while coverage of corporate governance issues was widespread, consideration of environmental and social issues was rare.

It said the overall analysis of extra-financial issues in M&A research was “lacking in sophistication and transparency”.
EAI chairman David Blood said: “In today’s market conditions, investors are regularly challenged to decide whether a proposed transaction promises value creation or destruction.

“The purpose of this summary study is to strengthen communications with research providers on the kind of research that best supports our investment decision-making and ownership practices — fundamental research that takes the long view and integrates material extra-financial issues.”

OnValues senior consultant Gordon Hagart added: “Investors want to understand how factors such as combining corporate cultures and governance systems and management incentives may affect the likelihood of a transaction delivering the value it promises.”

AFL-CIO seeks to block private equity IPO

Now this is proper union activism in the capital markets. The AFL-CIO in the US has written to the SEC (their financial markets regulator) asking them to look into the private equity group Blackstone's plans to list on the US stockmarket.

This is from the AFL-CIO site:

Letter from AFL-CIO Sec.-Treas. Richard Trumka Urges SEC to Action

Washington, May 16 — The AFL-CIO strongly urged the U.S. Securities and Exchange Commission to enforce the law and require The Blackstone Group L.P. to register as an investment company regulated under the Investment Company Act of 1940. The Blackstone Group L.P. public offering is currently being reviewed by the SEC, and has attracted much attention as one of the first major public offerings by a private equity and hedge fund firm.

In a 14-page letter to the SEC dated May 15th from AFL-CIO Secretary-Treasurer Richard Trumka, the AFL-CIO analyzed in detail why it believes that The Blackstone Group deliberately structured its public offering of The Blackstone Group L.P. to hide the fact that The Blackstone Group L.P. is actually an offering of interests in pools of investment securities. Public offerings of interests in pools of investment securities are by definition required to register as investment companies under the Investment Company Act.

“Blackstone wants to book profits on investment assets like an investment company and claim the tax benefits of an investment company, but refuses to comply with the laws governing investment companies. That’s unacceptable and the SEC should step in and enforce the law,” said Richard L. Trumka, Secretary-Treasurer of the AFL-CIO.

The AFL-CIO warned that if The Blackstone Group L.P. can avoid SEC regulation, it is only a matter of time before mutual funds, hedge funds and other investment pools use similar strategies to avoid regulation and disclosure requirements while selling securities to the general public.

The AFL-CIO is the federation of America’s labor unions, representing more than 10 million workers. The labor movement’s interest in The Blackstone Group L.P.’s public offering stems from the fact that union members are also investors. Union members participate in benefit plans with more than $5 trillion in assets. Union-sponsored pension plans hold approximately $400 billion in assets, and union members also participate in the capital markets as individual shareholders. Mutual funds increasingly make up the primary or secondary retirement savings vehicle for millions of working Americans.

Under the law, investment companies such as mutual funds that sell shares to the public are subject to strict regulation through limits on leverage, caps on fees, and corporate governance provisions intended to protect investors. Until it completes this offering, The Blackstone Group is a private investment company. Hedge funds, private equity funds and other private investment companies are not covered by the Investment Company Act.

The AFL-CIO asserts that The Blackstone Group L.P. cannot have it both ways: it cannot sell interests in its investment funds to the public and not comply with the rules protecting the public. The Blackstone Group L.P. also cannot claim favorable tax treatment from the Internal Revenue Service as a passive investor and, at the same time, avoid SEC regulation by claiming that its primary business is actively managing businesses.

Wednesday 16 May 2007

Capital stewardship critics

I recently stumbled across this article on the US labour movement's capital stewardship activity. It's notable that as soon as trade unions get involved in in an organised fashion in investment activity suddenly people on the Right get very twitchy.

The article I have linked to is a good case in point. You can tell the author desperately wants to find the smoking gun proving that the unions' secret agenda is broadly anti-capitalist. The problem is he can't find the evidence. And that's because unions want the companies they invest in to do well, not badly.

If you spend any time looking at the workers' capital movement in practice what really strikes you is how responsible is. Campaigns target genuine issues, often plain vanilla governance concerns that other investors have a problem with. So it annoys the cr*p out of me when some in the governance and SRI world misrepresent the TU agenda, or dismiss issues that unions are trying to bring to other investors' attention. Some UK investors did not cover themselves in glory over First Group last year for instance.

Anyway, back to the article. Having failed to find any serious evidence of scary unions doing things he still manages to conclude with the following sentence:

No matter what definition of fiduciary duty fund managers come to accept, unions will likely continue to play by their own broad definition, one that is likely to politicize public companies. That would be a bad deal for investors, managers, and employees.

As far as I am aware there has been no academic research done into the performance of companies targeted by union investment campaign, so how can he conclude that they would result in "a bad deal"? It's just unsubstantiated propaganda.

Finally isn't it striking that some issues only become political, or 'politicised', when unions oppose them. Bit of a broader point, but the clear assumption on the part of people like the author of this article is that the status quo is somehow apolitical. Presumably on that basis feudalism, slavery, racism, exploitation etc only became 'politicised' when people campaigned against them. That's clearly nonsense, and to suggest that the activities major public companies are not 'political' is equally nonsensical.

Low oppose vote at Shell

Not much to shout about at Shell's AGM. The oppose votes and abstentions only accounted for about 6.5% of the total of the vote on the company's remuneration report. On the other hand the bloke from ABN Amro who was supposed to be standing as an independent withdrew just before the meeting. This was in response to pressure from Dutch pension fund ABP and others, in relation to his poor handling of the sale of ABN.

Tuesday 15 May 2007

Middle class Marxists

This is rather off-topic, and not (as you might assume) about the SWP. I spotted this piece in The Grauniad a few weeks back about some scenario-planning done by the Ministry of Defence Development, Concepts & Doctrine Centre, so I thought I would track down the report. You can download it here.

The bit that interested me is the idea that there might be a resurgence is support for Marxism, or other revolutionary ideas like anarchism. On the one hand this is because some groups, who do poorly out of globalisation, might see it as a way of 'fighting back'. But more interesting (to a man with a mortgage) is that idea that the middle class might embrace Marxism in a big way, and even try and organise as a class. The report suggests that mineral water-drinking types like myself may feel squeezed between a violent underclass and a super-rich elite we can never join.

I have to be honest and say I do have some serious pangs of antipathy towards people higher up the scale these days, despite being a fairly moderate lefty. If you spend any time looking seriously at executive pay it does that to you. You just get the feeling that these people will pay themselves ever-increasing amounts of money whilst simultaneously cutting back decent pension schemes for their employees and off-shoring jobs.

Perhaps it is not surprising in this context that private equity it taking so much flak as it seems to epitomise the acceleration of these trends - higher pay for execs, tighter control of labour 'costs', less public accountability.

So maybe there is something in what the report says. Worth a read anyway.

Finally, another bleak note in the report (which is not the most postive document) is the potential for inter-generational conflict:

Declining youth populations in Western societies could become increasingly dissatisfied with their economically burdensome ‘baby-boomer’ elders, among whom much of societies’ wealth would be concentrated. Resentful at a generation whose values appear to be out of step with tightening resource constraints, the young might seek a return to an order provided by more conservative values and structures. This could lead to a civic renaissance, with strict penalties for those failing to fulfil their social obligations. It might also open the way to policies which permit euthanasia as a means to reduce the burden of care for the elderly.

Again I can see this starting to happen. I know a few people with techy knowledge of pensions who react quite badly when they hear people with decent occupational pensions who retired early complaining about their lot. In the future we are going to have to work longer and pay more to get less. I can see it becoming a friction point.

Monday 14 May 2007

Shell showdown

Tomorrow is Shell's AGM. There's some opposition to the company's remuneration policy, including the lack of linkage between exec pay and safety. Personally I'm not expecting a massive vote against.

Here is IPE's take on it:

Pensions revolt looms over Shell salaries 14 May 2007 16:03:

UK/NETHERLANDS - Pensions Investment Research Consultants (Pirc) has recommended Royal Dutch Shell investors vote against the company's remuneration report at the oil major’s annual meeting on Tuesday in The Hague.

Shell does not disclose the performance conditions attached to outstanding share awards so investors should reject the remuneration deals tabled, according to corporate governance consultancy Pirc.

“Taking the long-term incentive plan (LTIP) and the deferred bonus plan in conjunction, vesting targets are not considered sufficiently challenging in light of the level of award,” commented Pirc.

The group added: “We also have concerns over the vesting scale and the small size of the comparator group.”

At the same time, Research, Recommendations and Electronic Voting (RREV), whose director David Paterson is also head of corporate governance at the National Association of Pension Funds (NAPF), has flagged similar concerns but has instead advised members to vote in favour.

Earlier last month, the Local Authority Pension Fund Forum (LAPFF), the activist public sector fund coalition, announced it is urging its members to vote against Shell’s remuneration policy.

LAPFF argues Shell, like its rival BP, should do more to link remuneration to management of non-financial issues like safety and climate change.

Shell today also announced Rijkman Groenink had requested the withdrawal of his nomination to the board.

This news follows last week’s pressure from Dutch pension giant ABP which, representing a powerful investor group of several pension funds, said it was considering voting against the appointment of beleaguered ABN Amro chairman Rijkman Groenink onto Shell’s supervisory board.

“The reason for his decision is that he wants to fully dedicate his attention to ABN Amro, given the current corporate activities around the company,” a statement on Shell’s website said.

ABP-spokesman Thijs Steger told IPE this morning his fund welcomes Groenink’s decision.

“Rijkman Groenink’s decision to withdraw means that he can focus for 100% on ABN Amro. We find this a big plus,” said Steger.

“For us, [Groenink’s attention on ABN Amro] was an important argument in the consideration of voting for or against his appointment at Shell.

Sunday 13 May 2007

KKR and Boots

There is still some argybargy between private equity house KKR and the trustees of the Boots pension fund. The Boots trustees want money upfront from KKR, and are talking quite significant sums - £500m initially according to some reports, and up to £1bn overall. They argue, rightly in my view, that the change in ownership combined with extra debat leaves the employer covenant weaker. KKR in turn say they are willing to put money into the scheme, but far less than that demanded by the trustees.

As I've mentioned before, this sort of thing is being actively encouraged by the Pensions Regulator.

There's a piece on the trustees standing their ground in The Observer today.

Friday 11 May 2007

TUC trustee conference - full details

Protecting future pensions - the role of trustees

The TUC Member Trustee Network annual conference in association with Cass Business School.

Friday 22 June 2007 9.00am to 5pm at Cass Business School, 106 Bunhill Row, London EC1Y 8TZ

After a long period of consultation and policy development, the dust is starting to settle on pensions reform. The responsibilities of trustees for safeguarding pensions, whether defined benefit or defined contribution, have been increased by the reforms. Recognition of the importance of the trustees' role is reflected in the requirement for pension funds to have 50 per cent member nominated trustees by 2009.

The theme of this year's TUC conference is the role of pension fund trustees in protecting future pensions. Keynote speeches from Pensions Minister James Purnell MP and Brendan Barber will set the scene, while breakout sessions will explore a range of issues currently facing trustees, including past service deficits, personal accounts and existing schemes, private equity and shareholder voting. Breakout sessions will also provide a chance to discuss the DWP's Deregulatory review and The Pension Protection fund. There will be a question and answer session with the TUC's nominees to the DWP's trustee panel. Since last year's conference the Companies Act 2006 has finished its passage through Parliament, enshrining 'enlightened shareholder value' in UK company law, and in a final keynote speech, Paul Myners will explore what this means for trustees.

The conference will be chaired by Jeannie Drake, Deputy General Secretary of the CWU.

The conference will be followed by a drinks reception.

To register for the conference contact Jayne Cranefield, tel -0207 467 1258, email

To download a booking form below:

Protecting future pensions - the role of trustees (PDF Download)

US union shareholder campaign almost unseats directors

Another example of the power of US union shareholder activism (I still think they were wrong to split tho!).

Shareholders Deliver Record Vote of No Confidence at CVS/Caremark Annual Meeting in a Direct Challenge to New Boardroom Failures

Unprecedented Withhold Votes from Roger Headrick Largest of the Year

Shareholders today withheld a record number of votes from two embattled nominees who presided over Caremark’s apparent backdating stock options and flawed takeover negotiations with CVS.

Shareholders withheld roughly 44 percent of their votes from Roger Headrick – the largest withhold vote of the year – and over 33 percent from Lance Piccolo, who both previously served on Caremark’s board. CVS had previously adopted a standard for majority voting in the election of directors so Headrick came within 6 percent of being removed from the board.

“Shareholders delivered the strongest rebuke against Headrick and Piccolo for their board performance,” said William Patterson, Executive Director of the CtW Investment Group. “The new CVS/Caremark board must act immediately to restore shareholder confidence.”

More information on the CtW Investment Group and its efforts around improving CVS/Caremark accountability is available at

Browne & out

Lord Browne has stood down as a board member of investment bank Goldman Sachs. Fatal safety failures don't cost you your job. But having a partner of the wrong sex does.

God I hate the Daily Mail!

Wednesday 9 May 2007

The choice conundrum

I wrote quite a while back about the White Paper on Personal Accounts and some of the behavioural insights in it. I thought it would be useful to pick out some key bits for anyone who is (like me) sad enough to be interested in how choice works, or not, in financial services. I think some of the analysis here is really pretty radical, and could probably be applied elsewhere -choice in health provision being an obvious example.

For info the excerpts below are all taken from pages 69-75 of the White Paper.

General consumer attitudes to choice in pensions:

Research evidence consistently indicates that many UK consumers find choices in pensions , including investment fund choice , overwhelming. This is one of the reasons why many do not choose to save voluntarily and are reluctant to seek information. This is particularly true of the target market. Evidence from both qualitative , and quantitative research , reveals a widespread lack of confidence among UK consumers in their ability to make decisions about pension provision. This lack of confidence is underpinned by low levels of financial capability, particularly among younger groups.

On investment choice:

The majority of the target group for personal accounts do not want to be faced with a choice over investments or administration of their pension, but a significant minority do. This minority tend to be younger or be higher earners, who have higher levels of confidence in their ability to choose and greater familiarity with financial choices.

Consumers lack confidence to make investment choices – evidence reveals a lack of confidence among UK consumers about investment fund choice. This is compounded by low levels of financial capability, particularly among younger groups and with regard to financial product choice.

Too much fund choice can be confusing – focus group discussions have suggested too much fund choice would make the scheme more complicated and confusing than it needs to be and that it would be likely to increase opt out rates. Findings from the US 401(k) scheme15 found that larger numbers of fund choices significantly reduced participation levels.

Consumers want structured choice – research indicates a shortlist of funds would provide choice for those who want it whilst minimising complexity, although overall no choice was generally preferred.

Choice needs to be appropriate – research evidence shows that where consumers choose their own investment, a substantial proportion adopt a ‘na├»ve diversification’ strategy, in which money is divided equally among a number of funds irrespective of the underlying asset composition of the funds. So, consumers who do exercise choice may not necessarily make the right decisions. Findings also show that investments are influenced by recent returns in the market, implying that the timing of the launch of the programme can have a strong impact on the asset allocations of the participants. This effect can be long-lasting because very few participants have altered their portfolios.

Here's a good bit on the role of competition:

In all the provider models, companies compete to get individuals to join their scheme. As people can switch between providers they can move to one with the lowest charge or the best service according to their judgement.

This argument only works if individuals are well informed about the market. They would need to be able to see which is the best provider or the best fund. Evidence suggests the target group are not well informed about this particular market. They find pensions confusing: they shy away from making decisions and their concern about making the wrong choice often means that they do not make any.

We have considered the competitive impact of each model in some depth. We do not believe the arguments are conclusive for either an NPSS or a provider choice model, but evidence shows that in the current pensions market competition does not always work to the customer’s benefit.

The Sandler review showed that there was little evidence that choice and competition in the pensions market drove down costs. The Pensions Commission26 showed that the reductions in charges that many people now benefit from were caused by regulatory changes – such as the introduction of stakeholder pensions and changes in the charge cap – rather than competitive forces.

Actuaries raise concerns about private equity

There's a bit in today's Telegraph about Watson Wyatt's views on private equity as an asset class for pension funds to invest in. It's worth a read, although it does seem to repeat some fairly well-known points such as the need to identify the best funds, questionable outperformance compared to the public markets etc.

Perhaps more interesting is the question of the sustainability of the current binge:

Watson Wyatt said there was a danger that private equity could become a victim of its own success. More than $300bn (£151bn) of new money was raised by private equity funds last year. Finding a home for that money has forced private equity investors to test the market's limits, paying higher multiples of earnings for target companies and funding deals with ever greater debt.

Union shareholder activism US-style

A glimpse of what the UK labour movement could be developing? Thanks again to John for flagging it up.

Workers, Shareholders Demand Reform at Verizon
Bernard Pollock of the AFL-CIO field staff reports on yesterday’s union actions at Verizon’s annual shareholders’ meeting.

Workers and shareholders let Verizon know they want a major shift in the way the company operates as more than 1,250 people rallied outside the Verizon meeting yesterday. The rally included hundreds from the Communications Workers of America (CWA), Electrical Workers (IBEW), United Steelworkers (USW) and scores more from nearly 30 international unions. Union members scored a victory when a shareholder vote on top executive’s pay packages was determined too close to call.

AFL-CIO Secretary-Treasurer Richard Trumka, IBEW President Edwin Hill, USW Secretary-Treasurer Jim English, USW District 10 Director John DeFazio and CWA District 13 Administrative Assistant Marge Krueger addressed the crowd, along with Pennsylvania AFL-CIO President Bill George and Allegheny County CLC President Jack Shea. Union workers at the company own approximately $3 billion in Verizon stock.

At the meeting, shareholders voted in the largest numbers ever for three proposals submitted by the AFL-CIO:

46 percent voted for the “Golden Parachutes” proposal, which would close substantial loopholes in Verizon’s policy on retirement packages. Verizon’s current policy allows shareholders to vote on severance agreements that exceed 2.99 times base salary plus bonus, but does not include retirement benefits, stock awards or tax reimbursements in the calculation. The proposal would encourage Verizon to eliminate the perverse incentive created when executives look forward to a windfall if they fail to provide good leadership for the company.

47 percent voted in favor of the “Compensation Consultants” proposal, which would safeguard the independence of pay consultants by requiring Verizon to disclose information to shareholders necessary for a full assessment of its consultants’ independence. This proposal is especially important at Verizon, whose former compensation consultant also performed hundreds of millions of dollars of business in other areas for the company.

More than 49 percent voted in favor of “Say on Pay,” which would require Verizon to submit executive compensation packages to a nonbinding shareholder vote.
The strong votes on the shareholder proposals indicate that shareholders will continue to demand for reform at Verizon, Trumka said.

The record votes at today’s meeting send a strong and powerful message to Verizon that shareholders will not stand for excessive CEO compensation. The question remains: Will Verizon listen, respond and reach out to investors, or will it continue to ignore the strong message that was sent today to clean up its corporate governance?

From the AFL-CIO blog.

Tuesday 8 May 2007

Elections & pensions

Hopefully last week's local elections will have demolished the idea that a left-wing alternative to Labour has any chance. Respect got nowhere, the Scottish Socialists were wiped out. All that voting for no-hopers like this achieves is splitting the Left vote, which can only help our opponents.

There's a reminder today of why this matters. Tory pension spokesman Phillip Hammond is getting on his soapbox again about "pensions apartheid". Does any body have any doubt that cutting public sector pensions will be high on the Tory agenda given all the noise they are making about this?

Conservative pensions spokesman Philip Hammond said: “Gordon Brown has created a pension apartheid in the UK. He has happily looted £5bn each year from people’s pensions funds while allowing the black hole in public sector pensions to expand at a shocking rate.

“It is the tax payer who will eventually have to fill this gaping hole. The lack of transparency in the Government's accounting for public sector pension liabilities is extremely worrying."

He added: "The money to fund gold plated public sector pensions will ultimately have to come either from cuts to public services or from an increase in taxation.”

From Professional Pensions site.

But let's not forget that the Lib Dems have been at it too.

"The huge disparity between public and private sector pensions is frankly absurd."
"It is essential that we establish an independent commission to review all public sector pension schemes so that they can move forward on a fair and affordable basis."

From the Lib Dems site.

Be careful who you vote for....

Monday 7 May 2007

Chief execs vs centre forwards

I've always had a problem with one of the defences of high exec pay that gets trotted out. You know, the one that goes "but no-one criticises the salaries that footballers get paid". So I'd thought I'd have a go at seeing how it stacks up in practice. Due to the lack of many academic papers of the subject, these are just my broad generalisations.

1. Actually people do criticise the amount footballers get paid. Look at abuse (rightfully) directed at Ashley Cole because of his comments about Arsenal's 'disrespectful' offer that forced him to move to Chelsea. Also what about the stick players get when they leave for another bigger club on more money, particularly if it's a rival.

2. It's a lot easier to quantify what players contribute to the success of their organisation, comapred to company directors. Not just goals, but assists, tackles, ground covered etc. This is becoming increasingly sophisticated too. In contrast much exec remuneration is linked financial results that don't necessarily have a direct linked to executives' performance.

3. There definitely is a functioning global 'market' for professional footballers. Just look at the number of foreign players at UK clubs compared to foreign directors of UK businesses.

4. Footballers sell merchandise too. I would suggest it might still be a while before you see kids sporting Lord Browne t-shirts. A Panini sticker book of FTSE100 chief execs is probably a way off too (although Jeff Randall probably already has an advance order in). Yet I've seen premiership t-shirts all over world.

So overall I don't think the argument stacks up.

In any case, shouldn't the real comparison be with football managers? In which case I think you might find that the average job tenure is shorter in football than in business.

Unions lobby Angela Merkel over private equity

Just noticed this release on the TUC website:

TUC to see German Chancellor about private equity and green jobs

This bank holiday Monday the TUC is taking part in an international trade union delegation to Germany to remind Chancellor Angela Merkel of the need to discuss tackling the growing influence of private equity firms, creating new environmentally-friendly jobs and making globalisation fairer when world leaders meet at the G8 next month.

Today (Monday), the TUC's Deputy General Secretary Frances O'Grady will be part of the union mission to Berlin, and will see Angela Merkel alongside the heads of trade union organisations from Germany, France, Italy, Russia, the US and Japan.

One of the key points that the unions want to raise with the German leader is the need for some kind of international regulation of the growing number of private equity firms currently taking over increasingly large companies across the globe. The unions are concerned that the involvement of private equity in a company can often jeopardise the job security of workers, force down wages, close pension schemes and generally lead to a deterioration in working conditions.

Another topic high up the union agenda in Germany will be the need for governments of the world to hasten the move away from economies dependent on fossil fuels and move towards new eco-friendly forms of power generation. The unions want the G8 leaders to give serious thought to the creation of new jobs in the sustainable energy sector, and to support workers whose jobs disappear as energy becomes greener.

TUC Deputy General Secretary Frances O'Grady will tell Angela Merkel: 'World leaders must make sure that workers, not just the rich, benefit from globalisation. The world mustn't become a playground for private equity, so greater regulation of the industry is needed. Unions want to play their part in creating growth which doesn't damage the environment and that means governments need to create new green jobs for the workers displaced from smoke-stack industries.'

The G8 Heiligendamm Summit takes place on 6 to 8 June. Today's trade union delegation to see Angela Merkel in Berlin is led by John Sweeney, President of the American trade union centre, the AFL-CIO, and Michael Sommer, President of the German Trade Union Confederation.

Friday 4 May 2007

TUC trustee conference

A date for the diary, the annual TUC Member Trustee Network conference is going to be on 22 June this year. I will post up more details once they have been publicised.

Thursday 3 May 2007

Pension funds vs private equity - update

As I've mentioned before, company pension funds (and their deficits) are increasingly a stumbling block for the buyout bit of the private equity market. Today the Pensions Regulator has issued a reminder to trustees to negotiate hard with private equity firms if a buyout is on the table. Effectively the argument is that a leveraged buyout represents a weakening of the emploer covenant, and as such trustees should look for some commitments to the pension fund upfront

This is both right in principle, and useful in practice. If private equity is, as seems likely, going to play an increasingly important part on the economy then we have to ensure this doesn't come at the expense of good pensions. The FT's take on this is pretty sound. The Lombard bit is pasted below. I think it's spot in saying the main point of the Regulator's intervention is to make trustees of smaller schemes (who might otherwise be taken for a ride) aware of the issues.

Lombard comments:

The Pensions Regulator’s attempt to put steel in the backbone of pension trustees is welcome, although it is likely to raise a groan from buy-out firms, which already have a tough time making leveraged public-to-private deals stick in the UK.

It may look as though the regulator is stating the obvious. In recent cases, including the acquisition of Corus, the steel company, by India’s Tata Steel and the abortive buy-out of J Sainsbury, the retailer, by a private equity consortium, trustees did press for higher contributions and improved status in the hierarchy of creditors. They recognised that a change in ownership – and an increase in leverage – could increase the strain on employer covenants.

Kohlberg Kravis Roberts, winner in the battle to buy Alliance Boots, is still negotiating with the target’s trustees. The firm may yet have to stump up a higher pension contribution, even though Richard Baker, Alliance Boots’ chief executive, insisted yesterday that the schemes were “well-funded”.

The regulator is also hoping his message will reach smaller companies, where trustees are sleepier and takeovers happen away from the white heat of publicity. They deserve all the support they can get.

Yet even in high-profile cases, bidders have shown a surprising nonchalance about the challenge posed to their bid arithmetic by pensions. In part, that reflects the inadequacy of accounting standards that mask the potential liabilities of pension funds. It is not only trustees who need to stay awake.

Wednesday 2 May 2007

A view from the industry

I'm always wary of getting drawn into a conspiratorial or cartoonish view of how the financial system operates. It's very easy to ascribe simplistic, and malevolent, motives to people/groups in the system if you don't take the trouble to listen to what they actually give as their own reasons for doing what they do. All of which is a long-winded way of repeating my argument that the labour movement needs to teach itself more about how things really operate.

With this in mind, I've taken to keeping an eye on what people from within the private equity industry are saying. I'll make two recommendations here. First is a book called Private Equity As An Asset Class by Guy Fraser-Sampson. This is really useful as it is a (largely) politically unopinionated walk-through of PE, and how investing in it works. There are a few digs at "left-wing politicians" but also quite a few at dodgy characters within the industry.

Second is the Going Private blog. This is quite a professionally done blog, and nicely written. It's also not going to provide lefties with much they agree with, but it's definitely worth a read. It's notable, for instance, that there's frequent reference to the quarterly earnings pressure that public companies are under.

Having said that, she's just done a hatchet job on the recent SEIU report. I don't mind that in itself, but the conclusion is a bit childish, more "bad language":

Don't worry though. The SEIU has some guidelines that will solve all of our economic problems.

The SEIU Principles for The Private Equity Buyout Industry:

The buyout industry should play by the same set of rules as everyone else.

Workers should have a voice in the deals and benefit from their outcome.

Community stakeholders should have a voice in the deals and benefit from their outcome.

Sounds kind of like Venezuela.

How US managers vote on social resolutions

I've just come across some excellent stats on how US fund managers votes on shareholder resolutions that address corporate social responsibility issues. The FundVotes webpage provides info on what percentage of these sorts of resolutions different managers support. Not surprisingly there is a wide variation, and socially responsible investors are far more likely to support resolutions.

Of course we can't do anything similar in the UK because fund managers here aren't obliged to make the information public. Social resolutions are very rare in the UK, with perhaps one or two a year at max, and sometimes none at all. But if you did want to find out how the various UK managers compare you would be lucky if you could find information on a quarter of them.

That's why voting disclosure remains an important battle here.

Tuesday 1 May 2007

Private equity fights back?

Thanks to John for pointing this piece about private private equity in The lawyer out to me. It seems to be a bit of a wail about the unions getting away with too much and the private equity not responding effectively enough.

This intervention of the unions and the questions being asked are not restricted to national issues, but form part of an international coordination and response to global investment issues.

The private equity industry needs to do more than follow suit. The British Venture Capital Association (BVCA) has made a timely intervention into the debate by announcing the formation of a working party to devise a code of conduct for the industry. However, by the time it has reached its conclusions and implemented a voluntary code of conduct, how far behind the international critique will the industry become?

Private equity is a global industry with global players - individual transactions may be governed by the legal framework of particular jurisdictions, but that is no reason to divide the industry along national lines. A degree of coordination by the whole industry may not be easy, but it may prove to be in the best interests of all concerned to avoid the situation where, in the face of criticism, private equity is permanently in a defensive 'catch-up' mode.

The interesting thing is that it is written by someone from a law firm. From a quick trawl of their website it seems that they get involved in deals involving both companies and financial institutions, which probably explains their desire to keep the PE party going.

Lord Browne has resigned

Lord Browne has left BP with immediate effect. After all the pressure over his pay arrangements, it was the Mail on Sunday that forced him out. Expect to see lots of stuff about his private life in the press shortly. Rather depressing, even if you disagree with his pay arrangements.

Trustees bad at picking managers, or managers bad at generating returns?

There's a piece on today repeating a point that has been many times over the past few years in the pensions industry. This is that pension funds tend to pick well-performing fund managers at the point at which their performance deteriorates. They also tend to sack poorly-performing managers just when they are about to turn the corner.

One of the key paragraphs in the article, in my view, is this one:

MacDougall explained where managers have performed well in the recent years "it is quite a high likelihood that they actually won’t maintain that performance in the period following when the trustees want to hire that manager.”

Or put it another way - manager performance is mean reverting.

Further down the article is this line -

His sentiments were echoed in a recent 'What if?' market review by consultants Watson Wyatt which warned managers should not be chosen judged on past performance but only on skills.

Pretty much an indication that manager selection is a leap of faith, rather than something you can do using stats.

I wonder how many times we have to hear versions of these basic truths before we conclude that active management is basically a waste of money. No managers seem able to deliver prolonged outperformance, and statistically those that achieve it for some time might just be reflecting the random nature of market. Maybe we need active management only to play the arbitrage function in keeping prices reasonably rational (although of course this didn't happen in the TMT bubble).

In which case can't we have it much cheaper please?