David Prosser: Why taxpayers will be stuck with Lloyds andRBS for some time yet

Wednesday 08 December 2010 01:00
Royal Bank of Scotland refused today to support proposals to ringfence different banking operations
Royal Bank of Scotland refused today to support proposals to ringfence different banking operations

Outlook How the British Treasury must envy its counterparts in the US, who have just netted billions of dollars of profit from the sale of their remaining stake in Citigroup. There is little prospect of an equivalent sale here, with no timetable yet devised for the disposal of the Government's 41 and 84 per cent stakes in Lloyds Banking Group and Royal Bank of Scotland respectively.

It is not just that the Treasury would welcome the proceeds of the sale of these stakes. Delivering the two banks back to the private sector would also take the heat off ministers, who must be fed up with being held accountable every time one of them pays a bonus or turns down a small business's application for a loan.

Also, as Stephen Hester, the chief executive of Royal Bank of Scotland told MPs yesterday, there could not be a more powerful symbol of recovery for his bank and the wider economy than the end of state support.

Unfortunately, however, shares in Mr Hester's bank trade at a price significantly below the level required for the Government to be able to sell its stake at a profit (the break-even mark is 50p). While ministers are keen to get shot of RBS, it seems inconceivable they would do so at a loss.

The position at Lloyds is more encouraging – the break-even price is 63p, so the taxpayer's stake is comfortably in the black. But a sale does not seem any more imminent here, either. With an ongoing Government-sponsored inquiry into the banking sector – which might eventually recommend the break-up of Lloyds, or at least a reversal of the HBOS merger – the Treasury can hardly start hawking the bank around.

Indeed, whatever the performance of Lloyds and RBS shares in the market, a sale is impossible before we hear the outcomes of the Independent Commission on Banking. And then, if the conclusions of Sir John Vickers, the chairman of the inquiry, prove to be negative for the banks, the Government is going face a difficult conflict of interest. If it adopts Sir John's proposals, it prolongs the period it must keep its stakes in RBS and Lloyds. If not, what was the point of the inquiry?

In the meantime, similar conflicts of interest will continue to pre-occupy ministers. Every row over bonuses, lending and regulation is another instance of one branch of government arguing with another.

The pensions pain is far from over

The BBC's dispute with staff over pension scheme reforms will not be the last such flashpoint, with the Government insisting yesterday that it will legislate to reduce the liabilities of private sector pension funds. It wants them to adopt the reform introduced in the public sector earlier this year, where pension increases are now linked to inflation as measured by the consumer prices index (CPI), as opposed to the retail prices index (RPI). The former tends to be lower and also less volatile – hence the lower costs for employers.

Although this represents a downgrading of pension scheme members' benefits, there is a reasonable justification for the switch. The retail prices index is heavily influenced by the cost of mortgages – since fewer than one in 10 pensioners still have a home loan, this is largely irrelevant to them.

Employers, of course, will not be unhappy to see the cost of sponsoring pension provision fall. Still, many will feel uncomfortable with having to impose a cut in benefits on their staff, particularly if those staff demand compensation in another part of their remuneration packages, as seems likely.

The move will be even more controversial for the many pension schemes where RPI-linked increases are written into the rules. And if, as pension experts fear, the government requires some level of retrospective reform, expect the clamour to move a notch higher.

David Norgrove, the chairman of The Pensions Regulator, warned yesterday that we are moving into the "end game" for final salary pension provision. He is right of course, with more and more employers shutting their schemes to existing staff as well as new members – and with the downgrading of retirement benefits that the Government now plans.

The inevitability of pension scheme closures will not, however, stop this becoming an industrial relations issue. And with goodreason – the schemes that are replacing defined benefit plans are, on the whole, inferior.

Ireland still getting inward investment

There was one spot of good news for the beleaguered Irish economy yesterday. Facebook, which like a number of other American technology companies has its European headquarters in Dublin, is to recruit more staff in Ireland.

Interestingly, Facebook downplays the importance of Ireland's 12.5 per cent corporation tax rate, which is deeply unpopular with many other European countries. Equally important, if not more so, says Facebook, is the fact that Ireland's government is more business-friendly than many others. It singles out the issue of immigration – Facebook says that where other countries (presumably it means Britain) are cracking down, Ireland is more flexible.

Now, we should take some of this with a pinch of salt. Companies are sensitive to the charge they shop around for the lowest tax rates. But the message does ring true: in seeking to attract inward investment, Ireland has done more than simply cut its corporation tax rate. It has also bent over backwards to frame policy around the needs of potential investors.

This is a lesson that Britain is still learning. Regulatory hurdles, the politicisation of issues such as immigration and, yes, tax policy too, all smack of a less accommodating attitude here.

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