Outlook: A mutual love affair ends as Lumsden quits Standard Life

Every little helps; Hampton/Lloyds

A new chief executive, a £750m capital raising exercise, the partial resolution of talks with the Financial Services Authority over new solvency rules, a new solvency statement, albeit one that was about as clear as mud ­ that's a lot to announce all in one day for any company, but especially one as rooted in tradition and resistant to change as Standard Life. So it shouldn't surprise anyone that the Edinburgh stalwart has not yet been able to go the whole distance and announce a definitive plan for conversion and flotation on the stock market, replacing policyholders with shareholders as the life assurer's owners. One step at a time.

Instead there is to be another strategic review in which full demutualisation will be only one of a number of options under consideration. We should not presume that flotation is the only way forward, insists Standard's new chief executive Sandy Crombie. Alternatives might include the demutualisation of certain subsidiaries, with the core life fund left in mutual ownership. Yet nobody believes such an ineloquent, half-way house solution could be the end game. If Standard is not fully committed to demutualisation by next April's annual meeting, when in any case it faces a demutualisation vote from disaffected members, I'll eat my hat.

Standard Life couldn't credibly have moved even to yesterday's staging post position with the old chief executive, Iain Lumsden, a staunch defender of the company's mutual tradition, still in place. Yet the company wouldn't even admit that much yesterday. According to the press release, Mr Lumsden is going because his planned retirement date meant he wouldn't be able to see the strategic review through to implementation, never mind that it was news to all but Standard Life insiders that he had any such plans.

The company's statement on solvency was equally opaque. Instead of telling us what the company's financial position is under the FSA's new, more "realistic" approach to solvency, Standard Life insisted on telling it as it was under the old one, which puts the company in a much more favourable light. We are no nearer knowing how much worse the position is under the new method. Standard would say only that it produces "different answers", a somewhat more modest appraisal than the FSA's description which cited "a significant divergence".

There appears to be no need for policyholders to panic: even under the new method, Standard Life is still above the minimum cushion the rules allow. On the face of it, this is not "Equitable Life: the sequel". The position is none the less quite bad enough. The FSA has reduced the amount of future profits the company is allowed to count as part of its regulatory capital from £1.75bn to £1bn, a clear indication that Standard has been too sanguine about its likely liabilities. Furthermore, plans to raise £750m of expensively priced "hybrid capital" shows that there must be a capital deficiency of some sort.

The FSA is also sending in its own independent experts to assess what's caused the divergence in regulatory capital, which cannot give policyholders much faith in the reliability of published numbers. Indeed, the position seems to have changed so markedly that Standard Life is being forced to offer anyone who signed up for a policy after its year end on 15 November full reimbursement, lest it be held liable for mis-selling.

Mr Crombie insists that Standard is being forced to consider changes to its capital structure because the environment in which the company operates has shifted so much, not because it has been poorly managed. That's not so much a dig at the FSA for beefing up the solvency rules, but more of an observation about the declining popularity of with-profits products, which even in Standard Life's case now account for only a quarter of new business. As a result, with-profits policyholders are being required to take perhaps too big a risk with their money in providing capital to the rest of the group for business expansion in other spheres. As the with-profits life fund shrinks as a proportion of the total, those risks get progressively larger.

So mutuality has outgrown its usefulness, leaving the joint stock company and private equity to inherit the earth? It would be a shame to think so, but that is certainly the implication of Standard Life's analysis. In the US, there are some examples of newly formed mutuals, but not many, and in Britain it is hard to think of any at all. The scandal of Britain's "rip-off" savings industry ought to provide rich territory for a revival in the mutually owned tradition, but there is no evidence of such a renaissance, and in today's highly regulated, volume dependent savings environment, the odds are heavily stacked against it.

Mr Crombie, a straightforward and decent sort from humble origins, is a more pragmatic operator than his predecessor, and also seems to command greater loyalty and authority internally. To his credit, he's responsible for what in recent years has been one of the more successful parts of the company ­ investment management. Company lifer and actuary though he is, Mr Crombie looks a good choice to manage Standard Life through the traumas that lie ahead. Outsiders aren't always the answer.

Every little helps

As if things were not bad enough for J Sainsbury and other struggling retailers, Tesco, the market leader, yesterday turned up the heat that little bit more with news of an £800m shares placing and plans to raise the same again through property disposals. Sir Terry Leahy, the chief executive, was uncharacteristically vague on precisely what he needs the new money for, but if the share placing was a touch opportunistic, nobody is going to fault him much given the impressive Christmas trading performance he announced yesterday. After a period of extraordinarily rapid expansion into new growth businesses, debt gearing was in any case beginning to look top heavy at 70 per cent.

With much of the new money apparently earmarked for further expansion in the UK, other retailers can only look on and groan. Tesco has presumably gone as far as it can in the growth of its core UK supermarkets business ­ though even here it has designs on 23 of the Safeway supermarkets that have been put up for sale ­ but Sir Terry believes he has only begun to scratch the surface of non-foods, convenience stores, financial services and utilities, where his relative market share is much lower.

The same is true of his overseas expansion, where despite market-leading positions in a number of territories, market share is still much lower than in the UK. One particular target for expansion is online, non-food retailing. In the seven weeks to 3 January, Tesco grew its year-on-year sales of DVDs by 46 per cent while CD sales rose more than 10 times faster than the market as a whole.

No wonder WH Smith and others have been struggling. Yesterday's dollop of new capital will give Sir Terry more fire power still. One day Tesco will slip on a banana skin, or in some way get outmanoeuvred by its rivals. But for the time being, it seems incapable of putting a foot wrong. Great for Tesco stakeholders; not so great for everyone else.

Hampton/Lloyds

Philip Hampton was never one to stay in a job very long, and so it has proved at Lloyds TSB, where he has been finance director just 18 months. Yet even if he had intended to stay longer, it plainly wasn't working out with the new, American-born chief executive, Eric Daniels. Mr Hampton wanted to sell Scottish Widows. More out of necessity than choice, Mr Daniels has decided to try to make a go of the bancassurance model. Mr Hampton wanted to cut the dividend to conserve cash. Mr Daniels has decided to leave it untouched. Mr Hampton has an excellent reputation, and shouldn't be short of job offers. But he likes M&A, having been at the centre of the break-up of both British Gas and British Telecom. Most of all, he likes a crisis. Sedately run companies focused on organic growth needn't bother to pick up the phone.

jeremy.warner@independent.co.uk

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