Recent message board postings have focussed on the potential threat of private equity to the pension rights of employees whose division of IBM might be sold off. However, we all have (or expect to enjoy) state pensions as well as whatever we receive from the IBM UK Pensions Trust. Nominally our state pensions are funded by our NI contributions (and our pension rights depend on what we have contributed). In practice they are funded from current taxation.
So why should we care whether a FTSE 100 company is a PLC owned by both private and institutional shareholders, or alternatively is owned by ‘private equity’? In the former case, a PLC will be liable to corporation tax on its profits; in the latter, the debt taken on by the private equity owner is liable to wipe out the trading profits such that no corporation tax is payable – and so no contribution is made to the general taxation which funds our pensions. And so, the tax burden falls instead on conventionally funded companies and the general public. A zero sum game, in fact.
Can we as individuals influence this? Consider a recent case, where Saga and the AA have merged, each privately owned, the joint venture continuing in this status. Many of you reading this will be AA members or be customers of Saga – Saga louts, as the joke has it. A recent BBC feature revealed that the AA and Saga had paid virtually no corporation tax during the time they entered private equity ownership. Saga might have been expected to be liable for about £50 million tax in the past year, but paid nothing. As a customer of the AA or Saga, you are contributing to the profits of a company which has managed, via currently legal financial engineering, to completely avoid paying its debts to British society. In the process, the short-term CEO of Saga (not the founder who built the business) has enriched himself to the tune of £150 million. Who will foot the bill? You, as a taxpayer, or other publicly owned UK companies.
So the suggestion is – boycott such companies. Leave the AA, join the RAC (owned by Aviva) or Green Flag (underwritten by AXA Insurance) or another provider of your choice. Buy your holidays from a wide range of public companies, or your insurance from a wide choice of UK and multinationals, but not from Saga. Put pressure on the Labour Government, and especially on its new Chancellor Alistair Darling, to correct a situation where a private equity fat cat pays a lower tax rate than an office cleaner – enjoying tax breaks designed to reward entrepreneurs rather than the partners in huge financial institutions. Perhaps the ‘masters of the universe’ might then think twice about buying companies dealing widely with the general public, especially with pensioners as is the case with Saga, if they see customers leaving them in significant numbers because of their financial shenanigans.
Note: The recent sharp increase in interest rates, combined with turbulence in the equity markets, related to significant banking losses in the US ‘sub-prime’ mortgage business – all these factors have combined to make the financing of private equity deals much more expensive. As a result, a number of deals have been pulled, and there may even be a question mark over the AA-Saga deal. This does not detract from the general argument that private equity financing is bad news for pensioners. If, however, private equity is indeed losing ground in terms of its financial strength and ability to take over large UK companies, this may be good news.