Their misfortune had come too soon to be covered by the new pension protection fund.The Government announced months ago that these people – notably the workers at Cardiff steelmaker ASW – would get help but no one knew how much. Now Wicks has spelled it out. They will be entitled to 80 per cent of what they would have received had their companies never gone bust. But there may be a worrying unintended consequence of the compensation arrangements and here I mean not just the temporary Financial Assistance Scheme designed to help the likes of the ASW workers and others whose schemes run into trouble before April but also the Pension Protection Fund, which is meant to make the pension industry pay for schemes which go under. The trouble with a safety net, according to the Pension Protection Fund’s many opponents, is that it changes the behaviour of those who might have to use it. Directors of companies with big pension schemes may try all kinds of financial acrobatics which they would otherwise shrink from, safe in the knowledge that if they miss the catch, they will not break their corporate necks. The civil servants at the Department for Work and Pensions have an answer to that objection. That is the risk-based premium which companies will pay to the Pension Protection Fund. The weaker the funding of their scheme – that is, the more risks they take with their scheme – the more they will pay. This way, according to the theory, directors will be discouraged from running down the pension fund, knowing that it will be bailed out if worst comes to worst. The trouble with this argument is that it assumes directors will take decisions with this in mind. But not only will directors not always take decisions with the Pension Protection Fund premium as the top consideration, in many cases they will not take decisions at all. Instead, key decisions will be taken for them by shareholders or, in the case of troubled companies, creditors whose interest lies not so much in the survival of the company as in extracting maximum value. This has serious implications. There is mounting evidence that corporate decisions are already being taken which might not be without the existence of the pension protection fund. To many, it looks increasingly like the pension tail is wagging the corporate dog. Department store Allders is a case in point. At a conservative estimate, Allders has a pension deficit of about 60m, much harder to manage than was its general level of debt. After struggling with trading and running down its cash, Allders started looking for a buyer to bail it out. There was no shortage of potential takers but then something changed. One of Allders’ biggest creditors was Lehman Brothers, owed around 100m. Like other creditors, Lehmans had been willing to wait and see what a white knight might bring to the table. Evidently believing it would get less than 30p in the pound, it sold its rights as a creditor to collect on that debt to a Monaco-based consortium led by private equity group Hillco. As one of the biggest creditors, the Monaco consortium was in a position to force Allders into administration. An administrator was appointed from Kroll Associates. And here is the rub. Allders was worth less out of administration than it was in it. Broken up, Allders was worth more than if it stayed together. One of the bidders, Alchemy, made it clear that it would only bid for Allders’ assets after it went into administration and not before. The Pension Protection Fund was a big part of the reason for that. The administrators could sell off the assets and repay the Monaco consortium a greater number of pence in the pound than they spent buying that debt. This could be done without even risking a confrontation with the pension trustees. The pension trustees receive actuarial advice, which should have told them that once the group was in administration, members would be covered either by the Financial Assistance Scheme or, if they waited until after April to wind up the scheme, the Pension Protection Fund. So there would be no need to compete as hard for the proceeds of the break-up. Allders went into administration. Without the Pension Protection Fund, would it still have done so? Perhaps we should not be bothered that the Pension Protection Fund, and even the mere prospect of it, is financially beneficial to a group of Monaco-based investors. But we should remember who pays for it. Here’s a hint. It is not the private equity groups. Andrew Verity is a financial reporter at the BBC
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