KeTech engineers working under a pension cloud

Published: 10:26PM BST 31 Aug 2009

Standing the middle of KeTech
Group's factory floor in Bilborough, Nottingham, is an old blue
Peugeot 406. Hidden in its headlights, wing mirrors and interior panelling
are a dozen mini camera lens. It is a "trap car".

Used by police forces in the Midlands, it records vandals attacking parked
cars in trouble spots. "Simple but effective," observed Lord
Mandelson, the Business Secretary, as he toured the factory at the
beginning of August.

He was there to announce that the taxpayer had taken "a significant
minority stake" in the engineering and electronics group – the first
investment made by the Business Department's new £75m Capital for Enterprise
fund.

The investment was needed, the assembled journalists and camera crews were
told, because KeTech Group was being starved of capital by the banks – in
this case HBOS.

"You are not a struggling company. You are a successful company. You need
capital and that is the point of [this fund]," was how Lord Mandelson
put it.

But if he had taken a closer look at KeTech's affairs, the Business Secretary
might have tempered his praise.

PENSIONS

"I've been Maxwelled," is how one former KeTech staffer put it. The
Daily Telegraph has discovered that pension contributions made by
employees of a KeTech subsidiary were never paid into their pension funds.

While the scale is nothing like Sir Robert Maxwell's infamous plundering of
the Mirror Group pension scheme and there is no suggestion the funds were
diverted or withheld in any criminal manner, the revelation has devastated
staff affected at KeTech's subsidiary Key Radio Systems.

Stewart Clark, Key Radio's operations manager, who was made redundant on July
31, was one of those to check his group personal pension when rumours of a
shortfall in payments surfaced. His scheme had been set up by Key Radio
before its acquisition by KeTech Group in 2008 and he found that no payments
had been made since March this year. "They deducted money from my
salary but did not pay it over. They did it definitely in May and June and
possibly in April too," he said.

Andy Wood, a software engineer, examined his pension, a second group pension
scheme set up by an independent financial adviser on KeTech's behalf with
Aegon Scottish Equitable, and found that none of his contributions had
entered his pension this year.

"They have robbed me," he said. "It should not happen in this
day and age. I thought there were safeguards after Maxwell. I have spoken to
the Pensions Advisory Service and they said the money taken from my salary
should have been paid within 19 days, otherwise it's an offence."

Another former Key Radio staffer, who asked to remain anonymous, found that
missing payments worth tens of thousands of pounds in his Scottish Equitable
pension were only made up on 27 July after he had been made redundant in
June.

A source at KeTech Group said that Scottish Equitable had not been sent
pension contributions for many months. It is understood that an
administrative problem with the scheme had prevented some initial payments,
but the source said: "When they finally got it sorted they [KeTech] did
not have the money to pay it off".

The payment delays were not restricted to the pension funds. Key Radio staff
had not been paid on time for many months. Mr Clark said: "In the last
six months we have been paid once on time. June's came in three instalments
and three weeks late."

Another former member of staff said: "The salaries of staff were
constantly paid late. Anything between three days and three weeks late. No
one was happy about that but in the current climate no one wanted to make a
noise because of the risk to your job."

July 31 was the deadline for when Key Radio staff sacked in June were to be
paid their outstanding salary, including one month's pay as notice and
unused holiday. A letter seen by The Daily Telegraph from Key Radio
stated: "All monies will be forwarded to you."

This did not happen. Instead, Key Radio's remaining staff at its base in
Aldermaston, Berks, were called into a meeting and sacked. The same day, Key
Radio was placed in administration.

ADMINISTRATORS

Accountants BDO
Stoy Hayward were formally appointed as administrators until August
11. But the firm had been working on KeTech Group for some time. Its staff
were present on July 31 at the factory in Aldermaston and it had sent out
information packs to former Key Radio staff in the first few days of August.

Mr Clark said he received a package containing "Redundancy, Insolvency: a
guide for employees" from BDO within a week of his sacking. It was the
first formal confirmation that he had been fired as he was working from home
on the July 31, he said. All the Key Radio staff contacted by The Daily
Telegraph were owed July pay.

Despite the impression created by Lord Mandelson's personal endorsement of the
group's underlying financial strength, the reality at KeTech Group and at
least one of its subsidiaries was far different.

The company's representatives said KeTech had £1m of profits on £16m of sales
in the past year and boasted a full order book that it could not act on
because it was running out of cash. However, KeTech's chief executive, John
Kearney, acknowledged on the day that the investment was a rescue. "We
would have gone into administration," he said.

Mr Kearney had overseen the rapid expansion of the group, acquiring a series
of businesses with the backing of his bank, HBOS.
As the company states on its website, "in recent years KeTech has
adopted an aggressive growth pattern through acquisitions".

These began with an electronics specialist, Jasmin Group, in 2004, followed by
a transport communications business, Ditra Systems, in 2006, then
electronics business Key Radio and 2As, a building management systems and
controls business, in 2007.

It appears that KeTech struggled to manage the growth in size and, while some
of the subsidiaries were prospering, the head office had not put in place
the financial controls required to keep a grip on the enlarged group's cash
flow.

Octopus Capital, one of two managers investing the Capital for Enterprise
fund, insisted on personnel changes as part of the refinancing deal. Group
finance director Graham Bawden resigned in late July, as did several other
directors within KeTech's subsidiaries.

Chris Allner, Octopus' head of private equity, said: "We introduced a new
finance director to the company and he was appointed before the investment
was made. He gave us confidence that he was on top of the numbers before we
put taxpayers' money in."

Mr Bawden did not return calls.

KeTech's John Kearney was vague about the details when asked by The Daily
Telegraph on August 13 whether he had already reduced the group's
workforce to cope with the recession. "There have been no redundancies"
he said, before admitting that some were likely as part of the refinancing.

However, he had visited Key Radio's offices on July 31 to tell staff that they
were losing their jobs. BDO confirmed that all the Key Radio staff had been
made redundant prior to its appointment on August 11. "It was not a
going concern," said a spokesman.

The administration came after months of cash flow problems at the group. At
Key Radio, staff had taken part in one round of redundancies in June. The
majority of staff were told on June 23 that they had survived the cull. A
month later Mr Kearney told them without any consultation that they were out
of work.

The day after Lord Mandelson's visit, a transport engineering company, Metro
and Tube Services (Mats), which had been advertised by KeTech as part of its
group, was placed in administration. Mr Kearney and Mr Bawden were both
directors. In fact, Mats was not legally part of the group, but again the
same administrators from BDO were appointed.

REGULATOR

Placing subsidiaries into administration is an unpleasant but often necessary
action for businesses battling to survive the recession. Retaining staff
pension contributions, on the other hand, is illegal.

A leading pension lawyer told The Daily Telegraph that any company
operating a pension scheme on its employees behalf and taking contributions
from them would have a duty to pay over the monies as authorised. Failing do
so would be a breach of contract and also of deduction of wages legislation.
For any diversion of pension contributions to become a criminal offence, it
would have to be shown that it was done intentionally, he said. There is no
suggestion of any such intention in this case.

Malcolm McLean, chief executive of The Pensions Advisory Service, a voluntary
advice organisation, said he would expect The Pensions' Regulator to view
any non-payment by a company as potentially a serious breach of the law. "That's
something they would come down on like a ton of bricks," he said.

Following an inquiry by one of Key Radio's former staff, the Pensions
Regulator has now intervened on behalf of the staff. Its enquiries to Aegon
Scottish Equitable found that the new KeTech Group pension scheme had not
commenced until March 11 but that no premiums had been paid.

Aegon said that it waited three months to see if the error was administrative
but last Wednesday had written to both KeTech and its independent financial
adviser, St James's Place Partnership, to notify them of the missing
payments.

CREDITORS

KeTech Group's new finance director Steve Berg was appointed on August 1 as
part of the refinancing, although he had worked on an interim basis at the
group since the end of June. In August he replaced Mr Bawden, who had left
KeTech.

Mr Berg said: "There's no secret that the company was in financial
difficulties hence the need for refinancing. The particular issue for Key
Radio is that it was sadly a loss-making business and consuming cash quite
heavily. Every company has to look at its organisational efficiency and
reduce its costs and that's no different for KeTech.

He added: "The issue for pension contributions . . . it got to a stage
where Key could not pay its creditors. One of those were the pension fund
related to Key Radio."

When asked whether he had known that payments had not been made for months, Mr
Berg said: "I was not aware. It's got to be subject to proper
investigation rather than speculation on my part."

He added: "There may be some earlier pension payments that were not made
but that does warrant proper investigation by the administrators."

KeTech's bank, HBOS, closed its overdraft facility on July 31 as part of the
refinancing agreement, Mr Berg said. "[Key] was being supported by the
group at the time but that was no longer sustainable. In terms of the new
financing, we were replacing bank funding with different funding. That
overdraft facility was no longer available to Key Radio and it was not
viable and it was then insolvent."

The financial problems extended beyond Key Radio. Trade creditors were owed
money and it is understood that KeTech Group also has a significant VAT
bill. Mr Berg said that KeTech owed tax to HMRC but declined to confirm how
much. "There's overdue payments to HMRC, this is true, and we are in
discussions with them about repayment," he said.

Octopus Capital acknowledged that there were issues within the group that were
thrown up by its due diligence. Head of private equity Chris Allner said
Octopus had hired BDO to analyse KeTech's balance sheet and it had
identified "a backlog of creditors" that would be paid. But these
were largely trade creditors and would not include creditors of Key Radio,
he said.

"When you invest in a company you make sure the liabilities on the
balance sheet . . . are going to get funded properly. We went through all
the liabilities of the business [KeTech Group] and believe we have got to
the bottom of all the issues."

When asked whether the CfE fund should take account of employee liabilities,
Mr Allner said: "What would be the best solution? We could have not
invested at all. We could have put 110 people unemployed and from a pension
position in no better situation. Instead we have a strong company that can
grow."

Mr Allner said Octopus was a "responsible" investor but neither the
firm nor the Capital for Enterprise fund had a responsibility for any
payments owed to staff jettisoned before the financing deal was signed, even
if they were only laid off as a condition of the deal.

"We invested in a business after Key Radio was put into administration.
Our responsibility is to make sure we invest in a robust group," he
said. "Had Key Radio been part of the group we would not have invested.
Our remit is a commercial remit. Hopefully to make a return for the taxpayer."

Mr Berg also defended the closure of Key Radio and the ongoing consultation
with KeTech Group's remaining 120 staff, who could face further
redundancies.

"It's no different from any other investment business. They [Octopus]
want to invest in healthy, sustainable businesses not businesses that are
going to take the cash and burn it. That was the issue with Key Radio,"
he said.

"The investment and the deal was on the core side of the business. You
would not expect them to put money in for an overdraft for a loss-making
company. It was not in taxpayers' interest or the investors'."

It is understood that Key Radio's administrator is now examining the staff
pension funds. One former Key Radio staffer, who asked to remain anonymous,
said he had been contacted by the administrator for information about the
pension and had been told that it planned to "make good" any
shortfall.

BDO would not comment on this, insisting that its investigations into all the
liabilities faced by Key Radio were at "an early stage".

A spokesman said: "Our comprehensive review of the business is not
suitably advanced to be able to provide any information relating to the
pension scheme at this stage. However, we absolutely have a duty to
investigate anything that might cause a liability on the business."

If trustees or pension providers cannot solve a problem then there are
other agencies to turn to

The Pensions Regulator can help pension scheme members when they have concerns
about their pension.

It advised the following:

"In the case of suspected non-payments of contributions, members should
go to the scheme trustees or, if there are no trustees, the pension
provider, first and it is then for the trustees or the provider to consider.
We can get involved if they find that there are missing payments and this
has not been resolved with the employer.

"We can then pursue on a case-by-case basis. If it is down to an
administration problem, the trustees or the provider should work with the
employer and the administration company to try and resolve the problem.

"If it seems that payments have deliberately not been paid, we would
expect any of these parties to get in touch with us straight away.

"In a worst case scenario we could fine the company but we have not done
that yet. We try to work with employers, trustees and providers to work
through the problems."

The Pensions Advisory Service, a voluntary body funded by the Government,
dealt with 7,746 complaints in the year to March, an increase of 10pc on the
year before.

It said that the biggest single cause of the rise in complaints was poor
administration of pension schemes, with increases in both delays and
mistakes.

If you have a concern about your pension, contact the Pensions Advisory
Service on 0845 601 2923 or the Pensions Regulator on 0870 6063636 or at www.thepensionsregulator.gov.uk