Jeremy Warner's Outlook: A buy-back from Sir Fred's RBS? Something must have changed, even if he insists not

C&W takes another turn for the worse; Pension prospects: that sickening feeling
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The Independent Online

Thanks Fred, We Love You, reads a breathless circular from Dresdner Kleinwort Benson, the investment bank whose calls for a big capital return from Sir Fred Goodwin, chief executive of Royal Bank of Scotland, were answered yesterday with news of a £1bn buy-back and a 25 per cent increase in the dividend.

An unrepentant Sir Fred none the less refuses to accept that this amounts to caving in to City pressure to stop making acquisitions so as to concentrate any surplus capital on returns to investors instead.

Actually, this is what RBS always intended once it reached its present level of capital strength, Sir Fred insists, brandishing a slide dating from August 2003, which does indeed seem to support this contention. Once the tier-one capital ratio reached the 7.6 per cent apparent in yesterday's figures, then the capital would start flowing back.

Believe it if you will. The widely held impression when RBS announced a big expansion through acquisition of Citizens in the US was that Sir Fred intended to go much further, mopping up little players in America's still fragmented banking industry until he became one of the top two or three in US retail banking.

Now he's apparently perfectly happy where he is, with a footprint that covers some 30 per cent of the US population. That's already big enough to put him in what he calls "the survivors pool" of those with sufficient critical mass to weather any coming shakeout in the economy.

Yet whether or not Sir Fred has been forced to don the hair shirt, or this was always what he intended at this stage of the bank's development, he's plainly in softer, more listening mode than he used to be. To say he's humbler would be putting it too strongly.

With one of the worst ratings in the European banking sector up until a few months back, he had to be. There was no obvious reason why this should have been the case, other than what the City began to call the "Sir Fred discount", the fear any surplus capital he might generate would immediately be reinvested in growth and acquisition making.

Some of you might naively have thought this was rather the purpose of being in business - as indeed Sir Fred seemed to - but actually what investors demand is simply that their banks become cash machines and pay out accordingly. I exaggerate, of course, just to make a point. Yet it seems to me that with yesterday's buy-back and dividend news, Sir Fred is starting to get the balance about right.

If Sir Fred wants to go acquisition hunting again - which no doubt be does - he's going to have to earn the right first. Yesterday's profits statement was a pretty good start. The concern at the interim stage was that far from being in a position to return capital, RBS might even have to raise more of it just to fund its organic growth.

This misapprehension seems to have been caused largely by a short-term spike in the quantity of risk-related assets RBS was holding on its balance sheet, having helped underwrite some very significant corporate transactions last year. Once bitten, twice shy. Though RBS is intimately involved in some of the mega-deals nowbeing attempted by European utilities, the exposure, should it materialise, will be defrayed much more quickly this time around.

Sir Fred has been through a difficult patch in terms of his personal reputation, during which, unfairly in many respects, he's been seen as imperious, overbearing and unwilling to listen to advice. This rather unfortunate phase seems to be behind him now, and it is in any case hard to find fault with the results announced yesterday. Time to test the waters with another acquisition? Best not to get ahead of ourselves quite yet.

C&W takes another turn for the worse

I'm obviously old fashioned about these things, but when Cable & Wireless paid a whopping great £674m in cash for Energis last summer, I naively assumed that this was C&W taking over Energis. As it turns out, it was in fact Energis taking over C&W.

Out went the nice, but ineffectual Francesco Caio, in comes John Pluthero, the Energis chief executive and, judging by his performance to date, something of a head banger. They've tried so many different strategies over the years at C&W, that yet another scarcely seems likely to make much difference. Yet Mr Pluthero's stab at the problem really does take some beating - he seems to have determined on closing the place down altogether.

How else to read the headcount reduction of a further 3,000 announced yesterday, and more bizarrely still, the pledge to shed 27,000 of C&W's 30,000 UK customers. This reminds me of a former editor of mine, who on reading the circulation figures after a disastrously misconceived relaunch, proudly announced without apparent irony that we had got rid of the readers we didn't want and had established a firm base from which to rebuild.

To be fair, there may be some sense in shedding customers who are unprofitable, yet most businesses would try to find ways of making them pay their way, or at least managing their exit in an orderly fashion. It is hard to see why you would want to tell them to their face to get stuffed.

Indeed, this was on almost every level one of the most unconvincing strategy presentations I have ever come across. There was enough management gobbledegook and bombast here to drive even the most enthusiastic of MBA students to despair, never mind the downtrodden employees and shareholders of Cable & Wireless.

Mr Pluthero announced that he was eschewing the market for global corporates as this had become dominated by BT, Equant and AT&T and was therefore too competitive. He may be right about that, but if he believes the market for larger UK corporates that he does intend to target is less competitive he's got another think coming. If anything, it is even more so.

He also wants to get rid of most of his small business customers, but intends to keep and invest in Bulldog, the domestic telecoms play where I imagine the average bill is even lower. Confusion like this leads to the gravest possible concern as to the future of this business. C&W's transformation from a dull but reliable stable of telecoms businesses in the former British colonies into this basket case of an enterprise is one of the longest and saddest road crashes in British corporate history. On yesterday's evidence, I see little hope of Mr Pluthero salvaging anything remotely durable from the wreckage.

Pension prospects: that sickening feeling

One of the most startling, and to most of us as we contemplate our ever dwindling pension prospects, alarming statistics of the week comes from Stephen Yeo, senior consultant at Watson Wyatt. In crunching the numbers, he's discovered that the annual income a pension saver receives for the same amount of money invested is 80 per cent lower today than it was 10 years ago.

This jaw-dropping adjustment is brought about by a combination of lower investment returns - the size of an average with-profits pension plan on maturity is about half today what it was 10 years ago - and declining annuity rates. Even allowing for the fact that most life companies were over distributing 10 years ago, this is a really quite extraordinary reversal in fortune.

With annuity rates as low as they are today, you would scarcely be much worse off if you put the lot into a building society account and lived off the interest. Only, of course, you are not allowed to keep and spend the capital as you please. The quid pro quo for the tax break you get for saving into a pension is that you don't later become a burden on the state by spending the pension pot and falling back on benefit.

New rules that come into effect next month will take much of the thunder out of the apparent iniquity of being forced to buy an annuity at ever more debilitating rates. In future you will be allowed to leave your pension pot to your descendants instead, though they must pay tax on it.

The bottom line in Mr Yeo's findings? If you didn't know it already, pensions just got a whole lot more expensive. The downside of living longer, is that most of us are going to have to work longer too. Get used to it.

j.warner@independent.co.uk

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