The Motability Scheme: an investor perspective
With over 6.8 million people in the UK affected by mobility impairments, the Motabilty Scheme, established in 1977 plays a pivotal role in helping disabled people with their mobility needs. The scheme enables those with a government-funded mobility allowance to lease a new car, scooter or powered wheelchair.
Before the Motability Scheme was established, only those disabled people who could drive themselves received any government help with transport. As a result, many disabled people were housebound for long periods and dependent on others for their mobility.
In recent months, MPs have criticised the Motability Scheme after it emerged it has amassed £2.4 billion in cash reserves and the remuneration package of its Chief Executive (CEO), Mike Betts was also questioned. We believe this criticism to be unjust.
It’s important to point out that there are two organisations involved in the delivery of the scheme. One named ‘Motability’, an independent charity, whose primary purpose is to set the strategic policies and direction of the scheme. The second named ‘Motability Operations’, is a commercial business which delivers the scheme on the ground.
Within the EQ Positive Impact Portfolios, bonds issued by Motability Operations are held by four of our preferred fund managers. We believe that both organisations play a key role in addressing mobility issues for disabled people. This is why we have featured the company in our 2017 Impact Report and 2018 Spring Quarterly Update.
The charity is governed by unpaid Charity trustees and would face serious funding issues without Motability Operations assuming the commercial risk of operating the scheme. As a large commercial outfit, Motability Operations has a duty to make sure its business is sustainable, profitable and attracts the right talent.
Some facts about Motability Operations:
- Sustainability: the company currently has 629,000 leased vehicles with its fleet worth approximately £6.5 billion. As a result, it holds capital equivalent to just over a third of the value (£2.4 billion) of the vehicles under lease. Being regulated by the FCA, the company must pass stress tests and still be in a position to operate, even if the value of the leased cars decreases significantly.
- Profitability: all profits (£200m in 2017) are either reinvested into the scheme for the benefits of disabled or donated to the Charity. In 2017, £113 million was invested in the customer proposition, this included free adaptations to customer vehicles and subsidies for wheelchair accessible vehicles. Over the last three years, the company has donated £265m to the Charity, playing a key role in supporting disabled people who no longer receive disability benefits due to reassessment by the Department for Work and Pensions.
- Attracting talent: the company generates revenue of over £4 billion a year and has become a relatively complex organisation which requires an experienced management team. While a total package of £1.7 million might sound high, it is exactly in line with the average pay of a FTSE 250 CEO.
It’s fair to say the business has a strong balance sheet and is in good shape. However, the Motability Scheme is of such importance, that it’s worth reviewing its service quality, governance and ongoing relevance:
- Service: according to the Institute of Customer Service, Motability Operations achieved the highest ever scores for both customer and employee satisfaction. The scheme itself has a customer satisfaction of 98%, and over 90% of customers renew their lease with Motability Operations.
- Governance: when Mike Betts became the CEO in 2003, the company was, by its own admission struggling. Its vehicle fleet was static at around 450,000, and poor financial performance threatened the company’s very existence. The new CEO decided to focus on improving customer satisfaction levels, renewal rates and overall profitability. He and his team have done a fantastic job turning around the company since then. His long term incentive plan was linked to the company’s long-term objectives of maintaining sufficient reserves, achieving high levels of customer satisfaction and renewal levels, lease affordability and excellent business culture. Having performed strongly against these objectives and it’s not a surprise that he was rewarded for it.
- Relevance: in 2003 the Disability Living Allowance (DLA) was replaced by the Personal Independence Payment (PIP). Everyone using the Motability Scheme to source a car had to re-apply. The result was that 43% (approximately 75,000 individuals) DLA claimants lost their vehicle. In most cases, PIP benefits appeals are won, meaning that they can get their car back. A sign of how dysfunctional and unfair the current reassessment process is. This is where Motability Operations plays again a key role by providing through the charity, cash payments to those losing their cars, so they have the means to purchase a second hand one.
For the reasons we have laid out above, we remain supportive of Motability and Motability Operations. With the company in a strong position, we have asked our fund managers to seek clarification on executive remuneration.
As always, ongoing engagement with our fund managers and the organisations themselves, are key to ensuring that the scheme remains part of our portfolios.