"The NHS will last as long as there are folk left with the faith to fight for it"
Aneurin Bevan

Monday, 30 April 2012

MyCSP Is More Like Circle Than John Lewis

The government is making a big fuss over their latest privatisation: the  Civil Service Pension Scheme (CSPS) . They claim that it has been "mutualised" and that it is "like John Lewis" and our compliant media (led by the unenquiring BBC) merely parrot whatever the government's Press Release tell them to say.

Before examining whether MyCSP is a mutual, or if it has any similarities at all to the John Lewis Partnership, let's first examine what those terms mean.

Mutual Organisations

The problem with the term "mutual" is that it is used to describe two different concepts. The government use the term to describe employee-owned, profit-share organisations, which are more accurately described as co-operatives.

However, most of us are used to the term mutual being used to describe organisations that give mutual benefits to its customers and the best example of this is building societies. With a building society the people who save money and the people who borrow money, are owners of the business. The staff run the business for those owners, and all profits go back into the business. There used to be hundreds of building societies, and many of these amalgamated in the 20th century.

The big blow to building societies was the Building Society Act 1986. This act of vandalism stated that if 75% of members of a building society (that is, savers and borrowers) chose, the society could be demutualised and their mutual rights would be exchanged for shares in the new public limited company. This led to a concept known as "carpetbaggers". These were people who joined a building society (for example, by saving the minimum amount of money the society allowed) explicitly so that they could benefit from demutualisation. For carpetbaggers, demutualisation was a goldmine because for as little as £1 they could gain hundreds of pounds of shares in the new company, which inevitably they sold as soon as the company's shares were listed.

Demutualisation meant that building societies could become banks. Building societies were founded to help people in a community to save money to own their own homes, this was their core business, and mutualism meant that being responsible to their "shareholders" means being responsible to their customers. Banks, however, treats shareholders and customers separately. Company law says that companies must be run for the benefit of their shareholders, and with a bank, this means that their customers are second place. It is no co-incidence that building societies were largely immune to the 2008 banking collapse: they stuck to their core business of lending to homeowners and did not take part in risky casino banking practised by the banks.

We would never know for sure, but if all banks were mutuals - run for the benefits of the savers and borrowers rather than shareholders - then perhaps the banking collapse would not have happened. The key message is that a mutual has no shareholders. The organisation is owned by the customers and any profits go back into the organisation for the benefit of the customers.

The most notorious bank in the 2008 banking collapse saga is Northern Rock: a former building society that demutualised into a bank. The last government nationalised Northern Rock to prevent it collapsing; the intention was always to de-nationalise it once the bank was restructured. The current government keeps stressing how much in favour it is with the mutual concept, so when it came to de-nationalise Northern Rock, it could have returned it as a mutual building society. It did not. In a huge show of rank hypocrisy the current government sold the profitable part of Northern Rock to Virgin at a knock down price. This is Virgin, the company who is now at the forefront of the privatisation of the NHS.


A co-operative is an organisation where the employees own the company and typically they practice profit-share, so that the employees benefit from any profits the company makes. This is very different from mutual societies where the customer effectively owns the company. When this government talks about mutuals they mean employee-owned and profit-share, so they really mean a co-operative.

Politicians like the concept of a co-operative because it allows them to abrogate their responsibilities of providing public services while appearing to look good. (Inevitably, as we will see below, the Tories manage to create co-operatives and still look bad.) If a public service is turned into an employee-owned, profit-share company, it means that the government no longer has responsibility for running that service. Indeed, since the government will merely be commissioning the service (using public money) they can choose to commission someone else having no responsibility for the fate of the employees of the company they reject. If there is one thing that politicians love, it is not having any responsibility! (Labour is just as guilty in this regard. In his speech to the National Policy Forum in 2010, Ed Miliband said "I am interested in mutual solutions to some of the issues we face in our public services", without mentioning what these issues are, and how mutualisation can "solve" them.)

Profit-share is seen as some kind of magic bullet to solve the issue of productivity and motivation of staff. Inevitably it is the opposite. The problem with profit share is how do you share the profit? If there is an egalitarian policy of dividing the profit equally between all employees, then there will be complaints that some people who are more critical to the business, and contribute more to creating the profit, should get a bigger share. To address this, profit-share is often based on the salary of the employee - this is the model used by the John Lewis Partnership. The profits are expressed in terms of a percentage of the company's salary bill: so if the salaries for last year cost the company £10m and the company makes a profit of £1.5m the profit share is expressed as 15% (£1.5m is 15% of £10m). This means that every employee is then paid 15% of their salary as their share of the profit. The higher your salary, the more cash you get.

Profit share on these terms can be seen as equitable, but only if there is a relatively flat pay scale. The problem we have at the moment is income inequality: executives of companies earn many times more than the lowest paid employees. The High Pay Commission say that in 2011 the ratio of the pay of the chief executive of Barclays to the average (ie, not even the lowest paid) employee was 75 and that this has risen from a value of 14 in 1979. Thus, if Barclay's had a profit share scheme, the chief executive (already earning a huge amount of money) would get 75 times more cash than the average employee. A factor of 75 makes a big difference: for example, if £100 was paid to the average employee, then this would be less than Job Seekers Allowance for a week, yet the equivalent for the chief executive ,£7,500, would buy a small car. Indeed, if the low paid worker were to get a profit share big enough to buy that low-price car, the executive would be paid over half a million pounds, enough to buy two Bentley Mulsannes.

What About John Lewis?

The history of the John Lewis Partnership is interesting. It was created in the 19th century as a private, profit-making company. In 1929 its last owner, John Spedan Lewis, decided to share profits with his employees, and in 1950 he handed over control of the company to the employees. John Lewis is still a private company, but all its shares are held in trust. This was spelled out in 1999 by the then chairman Sir Stuart Hampson:
Responding to pressure from John Lewis staff, who are referred to as "partners" in the department store and Waitrose supermarket group, Sir Stuart said that such a sale was impossible under the partnership's constitution. "The fact is that the partnership cannot just be cashed in at the whim of one generation of partners," he says. He said it was a myth that the company is a mutual organisation that belongs to its members in the same way as a building society. "We talk about the business belonging to partners, but in fact the Partnership is owned in trust by John Lewis Trust Limited."
There was some hysteria in 1999 when it was suggested that the company could be "demutualised" with each employee receiving £100,000. A figure like that would make the most ardent supporter of employee-ownership think again. But as Sir Stuart pointed out, John Lewis is not a mutual, and so the company could not be demutualised. This fact is important because it prevents the carpetbagging that occurred in building societies.

John Lewis practices profit-share, where employees get a share (called the Annual Bonus) based on their salary. In 2011/12 John Lewis Partnership made a profit of £354m on a turnover of £8.7bn. The Annual Bonus that year was £165m or 14% of salary. This is great for Executive Chairman, Charlie Mayfield, who is reputed to earn £950,000 (so his bonus would be £133k, enough to buy him the lower cost Bentley Continental), but it would mean very little to a shop floor "partner" reputed to earn £7 per hour. Indeed, with the London Living Wage set at £7.85, the shop floor Partner is getting a raw deal, and the Annual Bonus only just pushes the hourly rate over what is considered the minimum wage for the capital (14% added to £7 comes to £7.98). There is a good argument that John Lewis Partnership should be paying their employees more salary so that they do not have to rely on the bonus to bring them up to the minimum necessary to live in London.

Unfortunately, there does not appear to be an official note of what the median pay is for a John Lewis employee. (The Evening Standard report linked above suggests that the chief executive earns 60 times the average employee income, so that suggests an average income of £15,800.) The only figure that can be deduced is the average (mean) salary taken from the 2011 annual report. The annual salary bill is £1,021.7m for 74,800 employees which gives an average salary of £13,650. This is very low and most likely results from the majority of employees being part-time.

Although this suggests that there is some controversy over how John Lewis pays its employees, it still remains that John Lewis has an interesting company structure. Every store has a branch forum with members elected from the branch. Each branch also elects a representative to sit on the Divisional Council. Further, each employee elects a member for the Partnership Council for the constituency that they are a member of (Trustees determine what these constituencies are). The Partnership Council holds management to account, influences policy and makes key governance decisions. It also elects 5 directors of the board and can sack the chairman, and it elects three trustees to the John Lewis Partnership Trust who own the company.

This level of employee democracy is unusual, but note that it does not happen through employee ownership of any kind - since the company is owned by a trust. If this government wanted to modernise Britain it could look at how John Lewis has democratised company governance. This model could be the solution to industrial strife and to corporate corruption.

What About Circle Healthcare?

Just for comparison, what about that other mutual/social enterprise/saviour of the NHS that the government keeps dishing out accolades to? I am talking about Circle Healthcare, of course. The following was taken from the Circle website in 2010:

Circle is structured as a partnership of clinicians and other professionals. Being a partner means you share in the ownership of Circle, with shareholder voting rights to help direct the company.

  • 49.9% of Circle is owned by Circle Partnership Ltd, which is owned by everyone who works in clinical services, directly or indirectly and at every level.
  • 50.1% is owned by Circle International plc. This is the investment vehicle that blue chip City institutional investors have subscribed to for shares by providing the capital for Circle. They ensure that any refinancing is achieved without diluting partners' 49.9% ownership.
  • The investment needed to buy land and build hospitals, clinics and invest in infrastructure is raised by Health Properties Ltd, a separate business.

So, the company is majority owned by the private sector, less than half is profit-share, employee-owned. Since less than half of Circle is a mutual, and the majority of the company is private, it is fair to say that the company is not a mutual, it is a private company. A social enterprise is an organisation that has a social purpose (one could argue that healthcare is a social purpose) and that all profits are invested back into the business. It is clear that a profit-share mutual cannot be described as being a social enterprise, and since half of Circle is owned by the private sector and half by employees who profit-share, it is clear that Circle cannot be described as being a social enterprise. (As to saviour of the NHS, well we all know that Circle is part of the problem, not the solution.) Bear these facts in mind when you read the next section.


Now to the government's new organisation, the bizarrely named MyCSP Ltd (CSP standing for Civil Service Pension). This new company will have 500 staff who will own 25% of the business. The government will own a further 35% and the remaining 40% will be owned by Equiniti Group, a private sector "business service provider". Yet again, the mutual part is a minority, so this is not a mutual. The government calls it a Mutual Joint Venture, but the Co-operative Party, recognising that the largest part of the company is private sector, calls it a "quasi mutual private enterprise".

One interesting point, that the BBC and most of the media seem to have ignored, is that MyCSP has been given a seven-year contract to deliver the administration services of the Civil Service Pension Scheme. That means the contract will be up for renewal in 2019, one year before the end of the next Parliament. It is possible that an enlightened government elected in 2015 could ensure that the CSPS is administered by a public sector organisation (inevitably the cheapest option) or if Ed Miliband is still insists that he is "interested in mutual solutions" he could ensure that the scheme goes to a totally mutual company.

Francis Maude the Cabinet Office Minister responsible for this new privatisation says: "As a mutual, MyCSP will deliver better services for its pension scheme members, millions of pounds of savings for the taxpayer and a real sense of ownership for employees over what they do" which is the usual guff that "mutuals are better than the public sector". Further, Maude claims that there will be "annual savings of 50% over current administration costs by 2022". It is very easy for Maude to say this because his target is a decade away, and it is extremely unlikely that he will be the Minister in a decades time, so this is an aspiration to which he will never be held to account.

MyCSP is not like the John Lewis Partnership because only 25% of profits of MyCSP is shared between its employees. Since only 25% of the shares are held by employees, it is not a mutual; the largest shareholder is a private company, so it is more accurate to call it a private company. This combination of part private sector, part mutual is just like Circle.

The evidence is clear, MyCSP is more like the private healthcare company, Circle, than the John Lewis Partnership.

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