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Phillip Inman
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Auditors face inquiry call after Lehman revelations
Mar 14th
MPs and financial experts demand regulators reform industry in effort to eliminate risky practices, writes Phillip Inman
Pressure was mounting this weekend for a root-and-branch review of the role played by auditors in the credit crunch, following the revelation that Lehman Brothers was able to hide $50bn (£32bn) of debts from regulators despite checks by accountancy firm Ernst & Young.
MPs and financial experts called on regulators to clean up the audit industry as part of a clampdown on reckless and risky practices in the financial sector.
Liberal Democrat treasury spokesman Lord Oakeshott urged the government to commission a fundamental review, while Tory MP Michael Fallon, who is deputy chairman of the influential treasury select committee, said: “Too much is being concealed. We need a fresh approach that gives a more realistic picture of bank finances and not one that disguises risky practices.”
Oakeshott said the treasury select committee’s investigation of Northern Rock’s collapse had already revealed that accountants should be banned from accepting additional consultancy work for the firms they audit; but, he added, “that is just a starting point to cleaning up the whole profession”.
Prem Sikka, a professor of accounting at Essex University and a leading critic of the accounting profession, warned that without deep-rooted reform the crisis could repeat itself. “The report into the collapse of Lehmans is indicative of a deeper malaise,” he said. “We rely on the discretion of eminent firms of auditors and lawyers that are paid millions of pounds for their efforts, but that discretion is too often abused.”
A damning 2,200-page report commissioned by the US bankruptcy courts into the collapse of Lehman said that Ernst & Young’s failure to act over off-balance sheet accounting practices which allowed the bank to hide $50bn of debts, and failing to investigate the concerns of a whistleblower, amounted to “professional negligence”.
Ernst & Young, which earned fees of $31m from auditing Lehman Brothers in 2007, has insisted that a thorough internal review showed it did nothing wrong.
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Linklaters defends handling of Lehman Brothers deals
Mar 12th
Report for United States Bankruptcy Court says City law firm approved off balance sheet transactions that disguised true state of Lehman Brothers’ finances
Linklaters, one of London’s premier law firms, is battling to defend its reputation after a US report into the failure of Lehman Brothers showed it approved controversial deals that shifted billions of dollars of debt off the balance sheet in the years before the bank collapsed.
The hard-hitting report found that the crucial deals, which were also sanctioned by Lehman’s auditors, Ernst & Young, were described as “window dressing” by bank staff and masked the precarious state of its finances while it was under scrutiny from regulators and investors.
Linklaters is expected to come under intense pressure to reveal the full extent of its dealings with Lehman in the run-up to the bank’s crash in September 2008. The firm is one of the “magic circle” of solicitors operating in the City, which in recent years have expanded rapidly to compete with US rivals.
The impact of the bank’s crash has been described as incalculable by some economists after governments around the world were forced to implement trillion-pound bailouts for their own banks caught up in the disaster. Investors are preparing lawsuits against the bank and are expected to turn their fire on lawyers and auditors advising it.
The report, for the United States Bankruptcy Court by examiner Anton Valukas, claims Lehman booked fund transfers as sales and failed to disclose them in regulatory filings in the US. Valukas alleges that Lehman turned to Linklaters after New York law firms said that they were unable to approve the deals under US law.
It was common practice to use so-called “Repo 105″ agreements at Lehman to sell and buy back funds, but their frequent adoption in the two years before its collapse amounted to balance sheet manipulation, the report said.
Linklaters dismissed suggestions that it played a central role in disguising Lehman’s mounting debt pile. A spokesman confirmed that the firm gave opinions on several transactions, but said it was not aware of any “facts or circumstances that would justify any criticism”.
He also pointed out: “The examiner, who did not contact the firm during his investigations, does not criticise those opinions or say or suggest that they were wrong or improper.”
Valukas said that the part played by auditors Ernst & Young was also crucial to hiding the fund transfers, and amounted to professional negligence.
UK regulators came under scrutiny in the report for their role during Lehman’s collapse. While Hector Sants, the Financial Services Authority chief executive, refused to give evidence directly to the US investigator, he published written evidence that showed a series of transatlantic telephone calls during which the US authorities begged the UK to help facilitate a possible takeover by Barclays.
The FSA’s evidence claims that Christopher Cox, then chairman of the US regulator the securities and exchange commission, was still lobbying the FSA at 3pm on Sunday 14 September – hours before Lehman called in administrators. Cox wanted the FSA to waive rules that required Barclays to hold a shareholder vote before the deal could take place.
Barclays later bought Lehman’s US businesses from the administrator.
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Pension Protection Fund takes on another seven failed schemes
Mar 11th
Workers of seven more failed pension plans join PPF, bringing to 120 the number of schemes protected by government
The number of crashed pension funds in the government’s lifeboat scheme swelled to 120 today after seven final-salary schemes were admitted.
More than 2,500 former workers at a carpet factory in Lancashire, a car repair firm in London and a leather goods maker in Somerset will be guaranteed retirement incomes after their occupational schemes gained entry to the Pension Protection Fund.
Within the next two years the fund expects another 357 company schemes to be rescued, adding 202,380 members to the 36,799 already protected.
Earlier this week the £4bn fund unveiled plans to increase investments in private equity and corporate bonds to end its reliance on equity markets and increase returns on investments.
The fund has been criticised by those who believe the large increase in crashed schemes will overwhelm its capacity to pay pensions, and it will have to increase levy payments or cut benefits to pensioners.
The PPF was set up in 2005 to rescue schemes of crashed companies following a series of insolvencies that left workers with worthless pension promises. Pension rules forced occupational schemes with large deficits to favour pensioners when a parent company went bust.
About 7,000 solvent final-salary schemes must pay an annual levy of £770m to support PPF pension payments and allow the fund to invest to cover future liabilities.
Pension payments are projected to rocket over the next 20 years as the baby-boomer generation retires. Alan Rubenstein, the chief executive, is under pressure to show the fund can match payments when costs reach their peak in 2030.
Pension experts have also expressed concern that a steep rise in company insolvencies this year could add to the PPF’s future funding deficit.
The National Association of Pension Funds, which represents schemes worth more than £800bn, argued today that radical reform of pension accounting rules was needed to prevent companies from closing schemes, often to avoid being pushed into insolvency.
The organisation said it would call a summit to lobby for reforms to the current standard, IAS19, which requires companies to value the assets and liabilities of their pension funds “in a way that both overstates the likely long-term costs of funding the pensions and results in a high degree of volatility appearing on balance sheets”.
The International Accounting Standards Board plans to review the standard before the end of next year.
Chairman Lindsay Tomlinson, said: “The standards have contributed to the decline in defined benefit provision over the last 10 years which has seen the number of schemes in the private sector remaining open to new members fall from 86% to 23%, a reduction of two million people.
“Current accounting standards have been very damaging to defined benefit provision, leading many companies to close their schemes. Pension funds are long term institutions but today’s accounting standards fail to reflect this,” he said.
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Regus angers landlords with administration threat
Mar 11th
• Landlords accuse Regus of exploiting insolvency loophole
• Regus looking for agreement on package of rental cuts
A simmering row between some of Britain’s largest landlords and Regus, the biggest provider of serviced offices, broke out today after the company threatened to put parts of its business into administration unless it reached agreement on a package of rental cuts and other concessions.
The British Property Federation, representing landlords, said it was outraged at the company’s behaviour and accused it of using a loophole in insolvency rules to strong-arm landlords into accepting rental cuts.
Liz Peace, chief executive of the BPF, said: “This appears to be a cynical move by a highly regarded company, and is the first time a part of the property industry has used such tools against the rest.”
Over recent months Regus, which operates 150 serviced offices in the UK and 1,000 around the world, has told several landlords that operate fixed leases it wants to cut the costs of unprofitable offices. It asked for cash to carry out refurbishment works, periods without any rent and a cut in future rents.
So far landlords have rejected the plans, pointing out that Regus was a highly profitable company with plenty of cash in the bank and could afford to honour contracts signed in good faith by landlords.
But the threat of some Regus offices going into administration has spooked the industry, which fears other firms could use rules allowing them put loss-making divisions into administration.
The plans could see about 30 of the 150 British-based locations becoming insolvent, leaving landlords without a tenant, if they did not agree to the terms.
Regus is set to report on 22 March and is expected to show a cash position of £229m in October 2009. The BPF said the cash position was unlikely to have changed significantly since then, “which would imply that the firm as a whole is not insolvent in any way”.
Talks with landlords were ongoing, said Regus. “The UK is the toughest business environment of our geographies,” a spokesman said. “Like many other companies with operations in the UK, we are seeking to re-gear a small number of leases. However, we remain fully committed to our operations in the UK. We will continue to grow our leadership position in the UK and are contracted to open six centres in the next two months.”
The use of insolvency has become common among retailers struggling to pay rent. JJB Sports, the DIY retailer Focus, and Blacks Leisure have all run up large debts with landlords, which were written off after the firms were put into administration. Insolvencies can also leave landlords with empty properties.
“The most galling fact here is that despite the cuts in margins Regus has obviously had to face in recent times, they have a strong cash position and a profitable business,” said Peace. “All firms have suffered in the recession so why should the shareholders of property firms – many of whom are likely to be pension funds – be bailing out badly negotiated leases or underperforming parts of another’s business?
“We need to see the insolvency rules tightened up to stop this kind of abuse and landlords need to think about asking for some kind of clawback if they make concessions to enable them to obtain some benefit from the upturn when occupiers they bail out come back.
“Any firms looking to use these kinds of methods to restructure should remember that the industry is cyclical and what goes around comes around. They could find it difficult in the future to secure they kind of terms they want when landlords are in a position to get tough.”
Its shares closed up 0.4p at 89.5p.
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Regus angers landlords with administration threat
Mar 11th
• Landlords accuse Regus of exploiting insolvency loophole
• Regus looking for agreement on package of rental cuts
A simmering row between some of Britain’s largest landlords and Regus, the biggest provider of serviced offices, broke out today after the company threatened to put parts of its business into administration unless it reached agreement on a package of rental cuts and other concessions.
The British Property Federation, representing landlords, said it was outraged at the company’s behaviour and accused it of using a loophole in insolvency rules to strong-arm landlords into accepting rental cuts.
Liz Peace, chief executive of the BPF, said: “This appears to be a cynical move by a highly regarded company, and is the first time a part of the property industry has used such tools against the rest.”
Over recent months Regus, which operates 150 serviced offices in the UK and 1,000 around the world, has told several landlords that operate fixed leases it wants to cut the costs of unprofitable offices. It asked for cash to carry out refurbishment works, periods without any rent and a cut in future rents.
So far landlords have rejected the plans, pointing out that Regus was a highly profitable company with plenty of cash in the bank and could afford to honour contracts signed in good faith by landlords.
But the threat of some Regus offices going into administration has spooked the industry, which fears other firms could use rules allowing them put loss-making divisions into administration.
The plans could see about 30 of the 150 British-based locations becoming insolvent, leaving landlords without a tenant, if they did not agree to the terms.
Regus is set to report on 22 March and is expected to show a cash position of £229m in October 2009. The BPF said the cash position was unlikely to have changed significantly since then, “which would imply that the firm as a whole is not insolvent in any way”.
Talks with landlords were ongoing, said Regus. “The UK is the toughest business environment of our geographies,” a spokesman said. “Like many other companies with operations in the UK, we are seeking to re-gear a small number of leases. However, we remain fully committed to our operations in the UK. We will continue to grow our leadership position in the UK and are contracted to open six centres in the next two months.”
The use of insolvency has become common among retailers struggling to pay rent. JJB Sports, the DIY retailer Focus, and Blacks Leisure have all run up large debts with landlords, which were written off after the firms were put into administration. Insolvencies can also leave landlords with empty properties.
“The most galling fact here is that despite the cuts in margins Regus has obviously had to face in recent times, they have a strong cash position and a profitable business,” said Peace. “All firms have suffered in the recession so why should the shareholders of property firms – many of whom are likely to be pension funds – be bailing out badly negotiated leases or underperforming parts of another’s business?
“We need to see the insolvency rules tightened up to stop this kind of abuse and landlords need to think about asking for some kind of clawback if they make concessions to enable them to obtain some benefit from the upturn when occupiers they bail out come back.
“Any firms looking to use these kinds of methods to restructure should remember that the industry is cyclical and what goes around comes around. They could find it difficult in the future to secure they kind of terms they want when landlords are in a position to get tough.”
Its shares closed up 0.4p at 89.5p.
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Babcock and VT begin merger battle
Mar 4th
Fight over merger that would create a defence group big enough to rival BAE systems begins after VT agrees to give Babcock financial documents
Two of Britain’s largest engineering and defence contractors locked horns in a merger battle today after weeks of skirmishes that have encouraged investors in both groups to consider backing a combined firm to rival BAE Systems.
VT Group, the defence services provider, today agreed to release financial documents to rival Babcock, despite vowing to fight a bid it described as unwanted and underpriced.
VT Group also dropped a bid for specialist contractor Mouchel to prepare its case against a Babcock merger. “Dropping the Mouchel approach allows us to concentrate all of our efforts on defending the Babcock bid,” VT said.
“We still think combining with Mouchel would be a good strategic move and we could come back for them in six months depending on what happens between now and then.”
The concession to provide details of the company’s finances were seen as a victory for Babcock’s chairman, Mike Turner, the former BAE chief executive, who insisted any offer for VT could only go ahead once he was allowed to conduct due diligence.
Babcock has already made two indicative offers in the past three weeks with its latest bid valuing VT at about £1.25bn, or 700p a share. The company, which runs submarine bases for the Royal Navy at Faslane and Plymouth, also made two informal approaches to VT last year, both of which were rebuffed.
Headed by Paul Lester, VT amassed a cash pile in 2009 after selling its shipbuilding interests to BAE Systems. Lester has called Babcock’s indicative offer “strategically unsound” and has hinted he might return funds to shareholders as part of its defence against the unwanted approach.
VT’s decision to drop its interest in British infrastructure group Mouchel came ahead of an 8 March deadline set by Britain’s Takeover Panel for it to make a formal bid.
Babcock, which owns the Rosyth shipyard, has signalled its intention to move away from defence into more lucrative and long-term support services contracts.
According to the firm, a takeover of VT would enable the two companies to cut about £27m off combined annual costs.
About 40% of investors in VT have stakes in Babcock and vice versa. The latest twist in the battle appeared to show that investors were keen for both sides to talk after weeks of uncertainty.
Babcock, which employs about 17,000 staff, put itself in a stronger position to mount a takeover before Christmas, when it offloaded £500m of pension liabilities. Like most engineering groups, including VT, Babcock has a large shortfall in its final salary pension scheme that has become increasingly expensive to close. The company insured itself against future cost rises, giving investors comfort that at least part of the deficit was capped.
Babcock has indicated that it is prepared to offer between 685p and 715p a share for VT. But analysts said that they believed the price should be at least 750p a share, or as high as 775p.
Angela Lascelles, joint managing director at fund manager OLIM, which holds 1.49% of VT shares, said: “Shareholders seem to be looking for at least 750p and I think [VT chief executive Paul Lester's] attitude is, if it is the right price he will accept it. That is my interpretation.”
VT’s third-largest shareholder, Scottish Widows Investment Partnership, recently said “significant shareholder value could be created” by a merger of the two businesses.
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Babcock and VT begin merger battle
Mar 4th
Fight over merger that would create a defence group big enough to rival BAE systems begins after VT agrees to give Babcock financial documents
Two of Britain’s largest engineering and defence contractors locked horns in a merger battle today after weeks of skirmishes that have encouraged investors in both groups to consider backing a combined firm to rival BAE Systems.
VT Group, the defence services provider, today agreed to release financial documents to rival Babcock, despite vowing to fight a bid it described as unwanted and underpriced.
VT Group also dropped a bid for specialist contractor Mouchel to prepare its case against a Babcock merger. “Dropping the Mouchel approach allows us to concentrate all of our efforts on defending the Babcock bid,” VT said.
“We still think combining with Mouchel would be a good strategic move and we could come back for them in six months depending on what happens between now and then.”
The concession to provide details of the company’s finances were seen as a victory for Babcock’s chairman, Mike Turner, the former BAE chief executive, who insisted any offer for VT could only go ahead once he was allowed to conduct due diligence.
Babcock has already made two indicative offers in the past three weeks with its latest bid valuing VT at about £1.25bn, or 700p a share. The company, which runs submarine bases for the Royal Navy at Faslane and Plymouth, also made two informal approaches to VT last year, both of which were rebuffed.
Headed by Paul Lester, VT amassed a cash pile in 2009 after selling its shipbuilding interests to BAE Systems. Lester has called Babcock’s indicative offer “strategically unsound” and has hinted he might return funds to shareholders as part of its defence against the unwanted approach.
VT’s decision to drop its interest in British infrastructure group Mouchel came ahead of an 8 March deadline set by Britain’s Takeover Panel for it to make a formal bid.
Babcock, which owns the Rosyth shipyard, has signalled its intention to move away from defence into more lucrative and long-term support services contracts.
According to the firm, a takeover of VT would enable the two companies to cut about £27m off combined annual costs.
About 40% of investors in VT have stakes in Babcock and vice versa. The latest twist in the battle appeared to show that investors were keen for both sides to talk after weeks of uncertainty.
Babcock, which employs about 17,000 staff, put itself in a stronger position to mount a takeover before Christmas, when it offloaded £500m of pension liabilities. Like most engineering groups, including VT, Babcock has a large shortfall in its final salary pension scheme that has become increasingly expensive to close. The company insured itself against future cost rises, giving investors comfort that at least part of the deficit was capped.
Babcock has indicated that it is prepared to offer between 685p and 715p a share for VT. But analysts said that they believed the price should be at least 750p a share, or as high as 775p.
Angela Lascelles, joint managing director at fund manager OLIM, which holds 1.49% of VT shares, said: “Shareholders seem to be looking for at least 750p and I think [VT chief executive Paul Lester's] attitude is, if it is the right price he will accept it. That is my interpretation.”
VT’s third-largest shareholder, Scottish Widows Investment Partnership, recently said “significant shareholder value could be created” by a merger of the two businesses.
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What should Britain sell to cut the national debt?
Mar 4th
Sell, sell, sell the Acropolis, the Parthenon and anything else that will fetch a handsome price is probably the most controversial answer to Greece’s debts problems.
But are the German politicians who recommend offloading heaps of Greek family urns to pay for yesteryear’s excesses going too far or merely putting forward a sensible solution that will allow the country to get back on its feet?
After all, why should the rich nations of the north bail out the Med countries? Already drenched in sun, why should they also bask in the comforting knowledge that cash is always on hand when the nation’s credit gets a little low.
Then, of course, there are countries like Britain and Ireland that have allowed massive property booms to create an artificial sense of wellbeing. Should we be selling assets to escape recession? The Irish have already started walking down Austerity Street in search of a more stable and sustainable economy. But that’s not Britain’s style. At least not since the war. Selling stuff to maintain a veneer of wealth is more our cup of tea. So maybe we should consider a deal with the Qataris to buy Hampton Court Palace, or persuade the Barclays Brothers to trade up from the island of Sark to the Isle of Wight.
We also have some largely inhabited islands. I’m thinking of the Hebrides. And lightly populated places like Sheppey in Kent, Canvey in the Thames estuary, and Anglesey. St Michael’s Mount in Cornwall could be a playground for some rich playboy/footballer/bonus-laden City trader.
All ideas welcome on how a fire sale could boost our finances and get the country back on its feet. What would you sell off?
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Greece should sell islands to keep bankruptcy at bay, say German MPs
Mar 4th
• Josef Schlarmann and Frank Schaeffler suggest firesale
• Acropolis and Parthenon could also come under hammer
Greece must consider a firesale of land, historic buildings and artworks to cut its debts, two right-wing German politicians said today in a newspaper interview that is bound to exacerbate tensions between Athens and Berlin.
Alongside austerity measures such as cuts to public sector pay and a freeze on state pensions, why not sell a few uninhabited islands or ancient artefacts, asked Josef Schlarmann, a senior member of Angela Merkel’s Christian Democrats, and Frank Schaeffler, a finance policy expert in the Free Democrats.
The Acropolis and the Parthenon could also fall under the hammer along with temptingly idyllic Aegean islands still under state ownership in a rush to keep bankruptcy at bay.
“Those in insolvency have to sell everything they have to pay their creditors,” Schlarmann told Bild newspaper. “Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.”
Only yesterday the ruling socialist government in Greece published its third attempt at reducing the country’s debts and pleasing EU government’s, which have pledged to support the beleaguered Greek economy if measures to cut debts are enacted.
Strikes and street protests have already threatened to bring many industries and public services to a standstill if the cuts go ahead.
But Germans remain unmoved by the troubles facing Greece. Opinion polls show Germans are overwhelmingly against a Berlin-funded bailout.
Greece’s deficit was 12.7% of national income in 2009, well ahead of the EU’s 3% limit.
Merkel will meet the Greek prime minister, George Papandreou, in Berlin on Friday.
“The chancellor cannot promise Greece any help,” Schaeffler told Bild in a story under the headline: “Sell your islands, you bankrupt Greeks! And sell the Acropolis too!”
“The Greek government has to take radical steps to sell its property – for example its uninhabited islands,” Schaeffler told Germany’s best-selling daily newspaper.
Greece’s deputy foreign minister, Dimitris Droutsas, was asked about the idea in an interview with ARD TV.
“I’ve also heard the suggestion we should sell the Acropolis,” Droutsas said. “Suggestions like this are not appropriate at this time.”
Germans have had an allergic reaction to reports their country may be part of a bailout for Greece. Many fear that a bailout of Greece could lead to similar calls for cash from Spain and Portugal, which have also suffered severe recessions following the financial crash.
Europe’s biggest economy itself is only just creeping out of its worst post-war recession. Last week figures revealed the German economy had stalled, while separately, politicians wrestled with a bigger bailout for its second largest bank, Commerzbank, which purchased billions of pounds worth of exotic financial instruments linked to US subprime mortgages.
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Unions defend too-narrow interests | Phillip Inman
Mar 9th
Posted by Phillip Inman in Business
No comments
Mark Serwotka’s PCS avoids tackling the inequality that sees baby boomers stay rich at the expense of future generations
When Mark Serwotka, the leader of the PCS civil service union, calls for bankers to be denied contractual pay and bonus hikes in the same way the government intends to cut redundancy and pension rights for civil servants, he has a point. Last year, thousands of bankers received bonuses despite the near-collapse of their institutions because lawyers trooped into the Treasury to announce that a rash of lawsuits would immediately hit the courts if the government banned contractually agreed bonuses.
Of course, ministers bottled a legitimate challenge to the City and its bloated, greedy practices. The gauntlet was there to pick up. The fight was necessary. It didn’t happen. Bankers got away with their illegitimate, ill-gotten gains.
This year, we were blackmailed with the threat that bankers would decamp to foreign lands if their pay was restricted. Suffice to say, we will never know. They were handsomely paid, by and large, and few made the trip to Switzerland.
Yet Serwotka, who is leading about 250,000 civil servants on strike today as yesterday, knows that two wrongs don’t make a right and his defence of civil service benefits is almost as ludicrous as the rearguard support put forward by bankers. There are redundancies to be made across the civil service and the terms are excessively generous. A 50-year-old middle-ranking administrator in any department can expect up to three times their salary and a pension for life under the old arrangements. That puts the price of his or her redundancy into the million-pound bracket.
The cost of a pension at 65 is around £100,000 for every £3,500 of retirement income. Add another 15 years of early retirement and a worker on £30,000 who is eligible for a pension of £20,000 can expect almost to double the cost of retirement from £550,000 to £1m.
Nobody in the private sector enjoys redundancy and pension terms this generous, at least no ordinary worker. Although Serwotka claims workers on low incomes will lose out, only workers on more than £30,000 will see redundancy terms cut from a maximum three years’ salary to two. Sure, early retirement is over, but that’s the case in most jobs now.
Serwotka, then, needs to make an even wider point than the one he makes about bankers. It is the same unspoken reason for Greek public servants taking to the streets. Without doubt, it is the running sore of the last 30 years that has recently swollen to resemble a boil. It is the gross inequality across society that rewards not only bankers but also a large minority of the property-owning classes who have secured for themselves a disproportionate amount of wealth, much of it in the form of IOUs that must be honoured by future generations, whether with reference to property prices, pension values or services like long-term care. They include MPs, most company directors and, bizarrely, trade union leaders, among the baby-boomer generation who have paid themselves generously, bought assets in the boom and awarded themselves guaranteed pensions.
Civil servants had guaranteed jobs and pensions. Having given up the former, they are loath to surrender the latter to a group, however ill-defined, that still hang on to their generous pay, homes and sundry benefits.
Unless trade unions tackle the wider inequality, they will continue to lose the argument and strikes will be merely symbolic. Until now, they have represented the narrow interests of their mainly older membership. Even Serwotka argues it is the new entrants to the civil service who should bear the brunt of cuts, while his existing members are protected. Such sectional representation wins elections (as Serwotka has recently done inside the PCS), but fails future members and society as a whole.