Motability says claims that it had not fully disclosed to MPs the details of a bonus scheme for Mike Betts are incorrect.

Betts, chief executive of Motability Operations, will step down after a National Audit Office (NAO) report highlighted concerns over governance and executive pay (fleetnews.co.uk, December 7). Its chairman, Neil Johnson, will be replaced when he retires in April.

The report acknowledged that Motability Operations, which operates a risk fleet of some 600,000-plus cars, provided an “excellent” service to customers.

However, it said executive pay was “generous” and linked to performance targets that were “easily exceeded”.

For example, a long-term incentive plan, implemented in 2008, enabled five executive directors to receive £15.3 million over seven years, for hitting targets set below levels already being achieved when they were introduced.

Furthermore, the NAO says that Motability Operations – which administers the scheme on behalf of the Motability charity – has made high levels of unplanned profit and holds more in reserves than other car leasing companies.

Amyas Morse, head of the NAO, called on the Government to consider the scheme’s future following its findings.

He said: “Motability Operations’ management deserves credit for having turned the business around and investing in features that have enhanced benefits for customers. However, it has taken an unnecessarily conservative view of risk, holds more in reserves than arguably it needs and has also made large unplanned profits. On top of which there has been an internal view of executive performance as being ‘consistently extraordinary’, with the reward to match, despite pressures from the charity.

“There is much to be proud of, but we think that stakeholders, including Government, need to give far-reaching consideration to the scheme as it now stands, and to its future, in particular, whether its governance and accountability arrangements are robust enough.”

The NAO investigation follows a highly critical report from MPs on the Work and Pensions, and Treasury committees, which labelled senior pay at the charity as “unacceptable”.

Published after a two-month joint inquiry, it called on the NAO to carry out the value for money review earlier this year (fleetnews.co.uk, May 21).

It said it was difficult to square the high levels of executive pay and significant financial reserves of Motability Operations with the scheme’s charitable objectives and the wider context of pressures on welfare expenditure.

At the time, Work and Pensions Committee chairman Frank Field MP said the organisation needed to “get a grip” and realise the “privileged position in which it trades”.

However, the fact that the NAO report now says that the joint inquiry was not given the full facts about a bonus scheme for Betts could have further implications for the charity.

Between 2010 and 2015, the chief executive benefited from an additional five-year long-term incentive scheme, designed to ensure his retention in post.

Motability Operations, says the NAO report, had only disclosed the initial £258,000 to the public through its annual report and accounts – the minimum disclosure required.

Payment of the scheme’s value, which was actually worth £1.86m in September 2018 and is likely to be worth around £2.2m by 2022, can be released at any time.

Field has now written to the chairman of Motability Operations to question the evidence he provided to Parliament, and also to the Secretary of State for Work and Pensions, Amber Rudd, pressing for action to match the scale of the NAO’s findings about the state of the scheme’s governance.

He said: “We knew already that executive pay at Motability Operations was out of control, but the NAO has now uncovered its full extent.

“Despite a joint select committee inquiry earlier this year, this is the first time these figures have been out in the open. Motability Operations now has serious questions to answer about the information they provided to Parliament.”

The organisation could be called to appear before the panel of MPs again and be charged with contempt, if it failed to provide the full details of salary packages during the committees’ joint inquiry.

However, Motability has told Fleet News that Motability Operations’ reporting of its CEO’s Long Term Incentive Plan fully complied with accounting standards and Companies Act requirements as they relate to unquoted companies.

“This has been confirmed by our auditors, PwC,” a spokesman explained. “Details of the arrangement, including the potential anticipated value of the scheme, were also disclosed in papers submitted to the joint Treasury and Work and Pensions Select Committee earlier in the year.

“In addition, the disclosures within our Annual Report and Accounts have been discussed at length with the National Audit Office.”

Motability Operations generates income from vehicles, both from its receipt of mobility allowances and through selling the vehicles at the end of the lease. Income in excess of costs results in a profit, which, in turn, bolsters its reserves.

However, from 2008 to 2017, the NAO report shows that Motability Operations made £2.19 billion profit against a plan of £1.14bn – an unplanned profit of £1.05bn.

In fact, the organisation has made more profit than it planned to in every year over the past 10 years. This was even the case even in 2008, where the value of used vehicles dropped sharply following the UK recession.

Its remarketing operation is significant. Last year, one in five three-year-old cars sold in the used car market came from Motability, with some 240,000 cars sold each year.

It has developed an online sales platform, which generates around 80% of its sales. This allows it to arrange sales before the vehicle is handed back by the customer for 20% of its fleet. Between January and July 2018, the value of its used car sales had outperformed the wider used car market by 2.2%.

The biggest drivers of unplanned profit were higher than expected profit on the sale of vehicles due to inaccurate forecasts on residual value (RVs). This, says the NAO, contributed £826m, 79% of total unplanned profit.

Furthermore, it says Motability Operations’ forecasts of the RV of vehicles at the end of lease agreements have been more pessimistic than wider market averages since 2009.

Overall, underestimating the forecast value of cars means customers were charged £390m more in lease agreements than was required.

Generating unplanned profit also compromises the ability for either Motability or Motability Operations to plan effectively for how best to use this profit in the longer term.

Between 2010 and 2017, Motability Operations donated £345m to support Motability’s grant activity and announced a further £400m donation in September 2018. Motability also expects to receive ongoing donations of at least £100m a year.

However, Motability does not have a long-term strategy and it is not clear that it can absorb the donations it has received as a result of Motability Operations’ unplanned profit in a way that can maximise their effectiveness.

Neil Johnson, the outgoing chairman of Motability Operations, defended the scheme’s operation and said measures were already being introduced to address concerns.

He said: “Our business model has allowed the company to return more than £500m in payments directly back to customers over the past 10 years. Moreover, efficient running of the scheme has ensured that prices are consistently 44% cheaper than any alternative.”

However, he said: “We will continue to work with the charity to invest to improve our service and value for money while supporting the Department for Work and Pensions (DWP) in their efforts to increase awareness and understanding of the scheme.”

Johnson was also quick to defend his chief executive, Betts, who will step down from his role by May 2020 at the latest. “I would like to set on record my appreciation for the dedication and passion that Mike has brought to the business,” said Johnson. “Under his guidance, Motability Operations has become an outstanding enterprise which delivers the highest levels of customer service.”

The NAO concluded in its report that careful consideration is needed relating to the scheme’s governance and Motability Operations’ executive remuneration.

The Government, it said, also needs to regularly review the value of the support it provides, in light of its objectives for mobility allowances.

 

 

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