Jeremy Warner's Outlook: The pensions blot on Chancellor's copybook

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The Independent Online

Gordon Brown was at it again at the Labour Party conference in Brighton yesterday, boasting of the fiscal and monetary stability he and his policies have introduced into the UK economy.

Gordon Brown was at it again at the Labour Party conference in Brighton yesterday, boasting of the fiscal and monetary stability he and his policies have introduced into the UK economy. If there was a coded message in his speech for his next door neighbour, Tony Blair, it was look at how the success of my Chancellorship contrasts with just about everything else Labour has turned its hand to.

Yet as ever, Mr Brown was being economical with the actualité. His record in macroeconomic policy is second to none; his record at the coal face of tax, social, enterprise and workplace legislation is much more questionable. Mr Brown railed against the injustice of a system which deprives workers of their final-salary pensions in insolvent companies, but he failed to mention his own central role in Britain's private-sector pensions crisis.

Since the Chancellor abolished the tax credit on dividends to spend the money on other things, it has cost the pensions industry approximately £40bn in lost revenue. At the same time, he and his ministers have all but destroyed the incentive to save by inflating the size of means tested benefit and loading up the industry with wasteful regulation. It is a pitiful record which is quite at odds with the sweeping claims and grandeur of yesterday's speech. In promising prosperity and social justice for all, the Chancellor promised to respond to the Pensions Commission, due to issue its interim report in two weeks' time, by doing whatever it takes to ensure pensioners can have a dignified old age.

The Government has made such a horlicks of it so far that there's not much reason for optimism. Adair Turner, the chairman of the Pension Commission, has been instructed to confine his interim report to a description and analysis of the nature of the problem in private pensions. Yet in so doing he cannot help but touch on the inadequacy of basic state pension arrangements and the disincentive to save caused by the present benefits system.

Mr Brown is keeping an open mind on the policy response, as well he might, for there are only two ways of providing an adequate basic state pension - either the Government has to be prepared to spend a lot more money on it, which inevitably means higher taxes, or it has to raise the age at which people are entitled to it. Mr Brown's trusty new servant at Work and Pensions (or is he Mr Blair's?), Alan Johnson, has already ruled out the latter and Mr Brown wouldn't agree to anything that endangered his reputation for fiscal responsibility. A workable policy framework looks as far away as ever.

Cemex bid for RMC

It is unusual to the point of being virtually unheard of for a company home grown in a developing economy to come acquisition hunting in the economically mature climes of Northern Europe. Nearly always it is the other way round, with British or European companies buying into emerging markets in the hope of recovering a modicum of long lost growth stock status. So why on earth are the Mexicans buying RMC, the British-based cement and ready-mixed concrete company?

The answer offered by Lorenzo Zambrano, Cemex's chairman and chief executive, is not wholly convincing. Reason number one is that it enhances Cemex's business model by providing the company with vertical integration from cement into ready-mixed concrete, aggregates and concrete products. Maybe so, but is it really worth paying a 43 per cent premium to the pre-bid price for "business model enhancement"? Somehow I doubt it.

Then there's cash flow stability through geographical diversification into developed markets. This would not be a bad reason but for the fact that developed markets don't seem to have brought much cash flow stability to RMC, which has been dogged by profits warnings in recent years. There have been repeated setbacks in Germany and, only last year, the company was heavily fined for infringing cartel laws.

Finally, there is an estimated $200m of annual synergies, which are not to be sneezed at but scarcely seem to justify the near $6bn it is costing Cemex to buy out RMC's equity and assume its debt. Cemex is a highly acquisitive company with a good track record in integrating companies and paying off the debt used to buy them. It is also three times as profitable as RMC on roughly the same revenues, while Mr Zambrano is plainly a financier and businessman of considerable ability.

Even so, it is hard to avoid the view that this latest purchase, the largest so far, is just expensive empire building, size for the sake of it. The cost of transport makes cement largely a local business. For obvious reasons, ready-mixed concrete is even more so. There are few self-evident economies of scale to be had from the global cement corporation.

RMC has put in place a credible turnaround strategy, but it is easy to seen why the chairman, Sir John Parker, virtually bit Mr Zambrano's hand off in accepting his money. The price is a long way off the all-time high achieved by RMC shares in the late 1990s, but it is more than double what they were trading at less than two years ago. In bidding high and buying a near 20 per cent stake in the stock market yesterday, Cemex has ensured there won't be any rival offers. Mr Zambrano says there is a "compelling logic" about the deal, yet from this side of the fence, it looks more like mezcal-fuelled bravado than carefully thought out strategy.

Lazard on IPO path

Bruce Wasserstein, the legendary corporate financier, has been chief executive of the investment bank Lazard for nearly three years now, yet opinions are as sharply divided as ever on whether he was the right man for the job. Now he's planning a $3bn IPO of the company's asset management and corporate advisory businesses. In so doing, he hopes finally to put an end to the row that has been simmering with Lazard's long-standing chairman/senior partner, Michel David-Weill.

M. David-Weill, part of the bank's founding family, and a group of disaffected former partners accuse Mr Wasserstein of squandering their inheritance on a recruitment spree which has led to the hiring of some of Wall Street's most expensive rain makers. Unsurprisingly, this has cut deeply into Lazard's profits, which means less money to distribute to M. David-Weill and his allies.

In a leaked exchange of private correspondence, M. David-Weill has already accused Mr Wasserstein of overstating profits. For his part, Mr Wasserstein reckons any supposed problem with poor profitability could be solved through a stock market flotation, allowing the company to pay its senior staff their bonuses with stock, rather than cash.

The idea is that some of the proceeds of the IPO would be used to buy out M. David-Weill, who owns about 9 per cent of the bank, and the former partners, thus removing a thorn in Mr Wasserstein's side and allowing him to pursue his chosen strategy for reviving the investment bank without hindrance.

Lazard is still as much of a London and Paris-based investment bank as a New York one, yet if Mr Wasserstein gets his way it will be from the US that the shots are called. Greenhills and other niche corporate advisory businesses have shown that you don't necessarily have to be big to succeed in the cut-throat world of investment banking, but you do have to find a way of paying your top people the megabucks they can command by working for Goldman Sachs, Merrill Lynch or one of the other bulge bracket firms.

Goodwill, loyalty and the more paternalistic, less pressured working environment a smaller player can offer only works so far in the absence of competitive rates of pay. Such is the merry-go-round of staff poaching that goes on in this business that Mr Wasserstein is making rivals that want to be included in the IPO's underwriting sign up to not attempting to hire any of his staff for at least two years. The IPO thus achieves an extra lock-in bonus.

So Mr Wasserstein is probably right in his chosen course. Yet there is an obvious flaw at the centre of his plan. Why would anyone want to invest in Lazard at the sort of fancy valuation it would take to persuade M. David-Weill to sell? The prospectus, if it ever gets to that point, will make interesting reading.

jeremy.warner@independent.co.uk

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