Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 180-199)

MR JACK DROMEY, MR PAUL TALBOT, MR PAUL KENNY AND MS MARIA LUDKIN

20 JUNE 2007

  Q180  Angela Eagle: What about TUPE?

  Mr Kenny: Effectively, it was not applied because the staff association could not apply it. In terms of other good examples, in the case of Birdseye that was sold by Unilever to the same group that owns the AA. We were told because of our concerns of what had happened elsewhere—we did a lot of public campaigning—that for three years things would be honoured and there would be no problems. In less than three months one of the big sites employing 600 people was targeted for closure. Does that happen elsewhere? Yes, of course factories close, but if you are paying £1.1 billion for an operation you cannot say you do not know that you will shut 50% per cent of the UK manufacturing base within three months. It is just naive to suggest that. Therefore, it does not apply and it needs to be extended.

  Q181  Angela Eagle: Are you worried about pension fund liabilities? I notice in your evidence you talk about private equity having broken pension promises and that a whole series of insolvent pension funds has been linked to private equity. What are your worries about that in terms of the savings of members?

  Mr Kenny: We have earmarked these for the Committee. There are some examples in that document that we would ask you to look at where effectively companies were put into administration and re-floated within 24 hours minus the pension fund liabilities which were transferred to the financial assistance scheme; in other words, the taxpayer.

  Q182  Peter Viggers: The aim of private equity firms is to get out an investment in three to seven years, so their idea is to seek to maximise value during that period. On the other hand, investors in PLCs have an average investment time of something like 15 months. That is a shorter term than for equity investors. You have been clear in explaining to us some of the disadvantages of equity investment. What research have you done about the impact of private equity companies on investment and jobs in the longer term, because the industry will tell you that perhaps initially there are job losses but in the longer term there are job improvements?

  Mr Kenny: First, if those are the figures supplied by the PVCA or Nottingham Business School we do not have access to them; we cannot go through them and audit them to make sure they are correct. They are not made available to us. Second, based on what they have said it appears that they include all three wings that I described earlier: the jobs created through straightforward venture capital entrepreneurs and the management buyouts. If we could scrutinise that research we would say there would be a plus on that side of the balance sheet but a minus on the management buyins. I am afraid that that research does not provide us with a great deal of comfort; in other words, we do not believe it is true.

  Mr Dromey: If you look at what is incontrovertible in relation to workers, one of the world's leading debt assessment agencies, Standard & Poor's, is absolutely clear that the impact of leveraged buyouts is to depress pay and conditions of employment and pensions. As to jobs, in our submissions we have put forward evidence of losses. The industry on the back of a fag packet has put forward an alternative argument. One of the things that this Committee could usefully call for is further work to be commissioned to establish beyond any doubt what the impact is on jobs. The impact on terms and conditions and pensions is clear, but we strongly believe that any independent analysis of the impact on jobs will bear out the criticisms that Mr Kenny makes.

  Ms Ludkin: I led the research for the GMB. We turned to academics throughout the country to look for independent research on the statistics provided by the BVCA. We did not find any independent evaluations that supported their numbers. The limited amount of research that is available discredits them at every turn.

  Q183  Peter Viggers: It seems that quite recently there has been a growth in shareholder action in public limited companies, perhaps stimulated by a fear of a private equity approach, and that individual small shareholders have been instrumental in achieving change in PLCs. That leads me to ask whether it is the glare of public scrutiny which operates in PLCs that prevents them from taking action, for example the leverage that you are able to exert on public companies acting as a brake to stop them carrying through action that they would like to take?

  Mr Dromey: Accountability of public companies is a thoroughly good thing; it is right that public companies should have to account to all stakeholders including workers. You will forgive me for saying that only on Monday of this week your leader spoke about social responsibility. It is to deny social responsibility to go from a public company to a world of private equity where people make fortunes in secret with workers paying the price.

  Q184  Ms Keeble: Mr Kenny, you have made a very detailed submission on pensions. You gave the example of a takeover where the pension fund collapsed virtually straight away and the liability went to the FAS. Do you agree that that is a very dramatic shift from the private to the public sector in terms of risk and liability?

  Mr Kenny: Companies go bust and pension schemes are in trouble. The FAS and pension protection fund were set up to deal with the realities of life. I am saying it is unacceptable for owners to put a company into administration in order to transfer their pension responsibilities to the state. That should be looked at. In the submission there are examples where companies have done exactly that.

  Q185  Ms Keeble: Do you believe that given that tendency there should also be a much higher level of accountability, scrutiny and transparency of what private equity funds are doing because at the end of the day the public sector will pick up the tab?

  Mr Kenny: Absolutely.

  Q186  Ms Keeble: What further powers would you like to see in terms of the protection of pension funds in these kinds of takeovers and buyouts?

  Mr Kenny: I believe that the example of Boots is quite a good one. Maybe without the kicking about, as one Member said, that debate would not have taken place.

  Q187  Ms Keeble: Do you think that the pension regulator has sufficient powers?

  Mr Kenny: I was going on to say that I believe the trustee should have specific powers to block or call in the regulator on those deals. The Boots example is a very significant one, but there are lots of others. Recently, United Biscuits which made its biggest gross profit for donkeys' years sent to the workforce a list of questions and answers. One of the questions was why they were not paying money into the pension fund because they had to pay off the debt.

  Q188  Ms Keeble: In terms of the Boots deal, what do you think about a private equity firm earning £43 million a year over 10 years when in the meantime it will pull out and there has been an £11.1 billion buyout?

  Mr Kenny: Where I live £41 million is a lot of money, but in the context of an £11 billion buyout that is chicken feed particularly in view of the thousands of pensioners involved.

  Q189  Ms Keeble: I put the question another way. A lot of your members and perhaps the GMB pension fund will have investments in private equity schemes and therefore will have an interest in the kind of returns that they can provide. What do you say to those of your members who have got interest the other way?

  Mr Kenny: I say two things. One is about the union's own investments. Our position is that we do not invest in private equity unless it is for a specific reason and we are after something.

  Q190  Ms Keeble: When you say "we are after", what do you mean?

  Mr Kenny: For example, we recently bought stock in 3i on the basis of a particular issue to do with its treatment of staff on a particular project.

  Q191  Ms Keeble: But that is a publicly-listed company and so it is a bit different.

  Mr Kenny: Yes. In terms of the pension scheme the union as the employer does not have control over the investments in the scheme; that is a matter for the trustees. But I think people have been a little naive about the supposed performance of private equity and the returns to pension funds over the past couple of years. Now that the rest of the market is doing much better people are beginning to understand some of the risks that they did not understand before. If you look at the 20% that is taken out, maybe when you put it all together the performance now will be comparable; we will have to wait and see, but this discussion among trustees would not have taken place 12 months ago and now it is.

  Q192  Mr Newmark: You have been critical of private equity. Notwithstanding the fact that you have tried to pass the buck to the trustees, the reality is that private equity firms are getting bigger and bigger mainly on the back of pension funds, including money managed on behalf of trade union pensioners. I am curious as to how psychologically you square the circle with the fact that it is your own pensioners who are driving this growth in the business. What checks and balances would you like to see in place so you can have more influence over that?

  Mr Kenny: I am not entirely certain that it is our pensioners who are driving the growth, with great respect.

  Q193  Mr Newmark: Are you saying that none of your pensioners invest in private equity?

  Mr Kenny: I do not think that the pensioners who are members of the GMB union fund, who represent 00000000.0% or whatever, are driving the market. I think it is a slightly bigger number than that. I was not passing the buck at all; I was just telling the truth. The union as an employer cannot determine where those investments go. As you well know, that is a matter for the trustees and actuaries to advise upon. It is done in an arm's length arrangement from the union. As to why that has been done increasingly, there has been low yield from gilts in the bond market, a lack of confidence in public equity, though we now see that coming back a bit, and overall people have been somewhat seduced by the amount of money available to get into that sector. It is now flattening out with the 20% fees that are charged, the changes in some gilts and bonds and the knowledge trustees now have about the potential danger. It is high risk and there is danger if interest rates rise.

  Q194  Mr Newmark: I will not debate with you what you see as the danger. I should like to move on to an assertion made by Mr Maloney today, which I assume was on the back of the booklet about private equities and broken pension promises, that £2 billion of unfunded liabilities were due to private equity. To take a leaf out of Ms Ludkin's book—she said one should look into the detail—I have had a look at two deals that represent 50% of the £2 billion. One is to do with MG Rover which turned down a private equity investor and went with a bunch of opportunistic investors, entrepreneurs, call them what you want, but they were certainly not private equity. The second point concerns Turner & Newall and a corporate raider called Carl Ekern. Again, it was nothing to do with private equity. I question the validity of this if just two of the examples which represent half have nothing to do with private equity.

  Mr Kenny: We spent about seven months researching this.

  Q195  Mr Newmark: I spent two minutes on it and found that half of it had nothing to do with private equity.

  Mr Kenny: May I suggest that you take a little longer?

  Q196  Mr Newmark: Why?

  Mr Kenny: I suggest that you do because you will find in it the examples of Apex and British Shoes.

  Q197  Mr Newmark: Is that Mr Cohen's firm?

  Mr Kenny: It is. A lot of other people have an interest in that. That company went into administration and £30 million and 1,000 pensioners lost out. That is worth a bit of scrutiny. This report represents only 21 about which we were able to get results out of 96 that we could identify. That lot came to £2 billion. You say that that accounts for 50%. No, it does not. We could not establish it. The challenge for the Committee is to try to establish where the other 95 have gone and how much they are.

  Mr Dromey: As far as Rover is concerned, can we nail once and for all the Alchemy myth? It is simply not true that what they were offering was between £40,000 and £60,000 in redundancy payments for those who wanted to go and protection of pensions for those who stayed. I know because I was involved in it; I know the workers concerned. Do not accept propaganda from private equity that is untrue.

  Q198  Mr Newmark: I am not accepting this propaganda either.

  Mr Kenny: With great respect, you can at least do us the courtesy of studying this.

  Q199  Mr Newmark: I have given you the courtesy and cited two examples that represent £1 billion.

  Mr Kenny: You said that you had spent two minutes reading a document that contains the details of 96 pension funds. I do not think that is doing it credit.


 
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