Business Analysis: Turner & Newall pensions crisis leaves questions over £400m bill

New Pensions Protection Fund faces huge liability within weeks of being formed

The crisis in the UK occupational pensions sector seemingly scaled new heights this week as Federal Mogul, the insolvent American car parts manufacturer, finally pulled the plug on the pension fund of its UK subsidiary Turner & Newall.

The crisis in the UK occupational pensions sector seemingly scaled new heights this week as Federal Mogul, the insolvent American car parts manufacturer, finally pulled the plug on the pension fund of its UK subsidiary Turner & Newall.

As a result, some 40,000 current and former workers of T&N moved one giant step closer to losing up to 70 per cent of their pensions, raising the pressure on the Government to clear up the confusion over whose responsibility it is to pick up the pieces.

The tale of T&N is a sad one. Having neared collapse after being inundated by asbestos-related compensation claims in the 1980s, the company managed to keep itself together before being bought out by Federal Mogul in 1986. But T&N and its US parent continued to struggle throughout the 1990s as asbestos claims mounted.

By the time Federal Mogul was forced to move into Chapter 11 bankruptcy protection three years ago, it became apparent that as well as asbestos, it now had another major problem on its hands - a sizeable hole in its UK pension fund, which was growing exponentially.

Like many companies, T&N had taken lengthy pensions holidays in the 1990s, when equity markets were soaring, electing to spend its pension contributions on other things. But when markets began to collapse three years ago, its scheme quickly developed a large black hole, which the company did not have the resources to plug.

Over the past three years, during which time T&N has been in administration, its parent group has been trying to broker a deal to keep the scheme afloat, as part of a wider restructuring plan to allow Federal Mogul to emerge from Chapter 11.

The problem has been that Carl Icahn, the US group's major bondholder, who holds most of the cards, has been rather mean. His first derisory offer - a one-off payment of $130m (£67m) to the scheme - would have plugged less than 15 per cent of the deficit.

With a liquidation of T&N's UK assets likely to net the pension scheme anywhere between £100m and £250m, it has always been clear to the scheme's independent trustees that accepting any less than this would be foolish.

After further thought, Mr Icahn came back to the table with a new offer which demanded greater consideration - to pay £14m a year into the scheme for the next three years, and to up the contribution to the minimum funding requirement thereafter. While the scheme would still have been left seriously underfunded, such a plan would have bought a lot of time.

Then, on Monday, out of the blue, Federal Mogul withdrew the offer, saying only that the UK's new Pensions Bill had changed matters. With the situation now seemingly back to square one, observers believe it is only a matter of time before the UK assets are liquidated and the pension scheme is wound up.

John Ralfe, a pensions consultant, believes the end of the negotiations between Mr Icahn and the trustees was always an inevitability.

"The T&N/Federal Mogul situation is incredibly complex - and in some ways it's become a lot simpler now that the improved offer that they've been negotiating over the past few weeks has gone away," he said.

"As far as I'm concerned, the negotiations over the past few weeks have been a red herring. Even if they had agreed to put up the amount of money they were proposing, it was not enough - where was the rest going to come from?"

The endgame promises to be more complex than it might first appear, however. Ros Altmann, the No 10 pensions adviser and governor of the London School of Economics, believes Mr Icahn's desire to get his hands on T&N's portfolio of UK assets, which includes the tyre manufacturer Ferrodo, will bring him back to the table with another offer.

But she concedes that whether Mr Icahn gets his way, or whether the UK assets are liquidated, the pension scheme is likely to get little more than £150m, after which its wind-up will be inevitable.

"Whether or not Icahn puts more money in, the scheme is likely to wind up in deficit," she says. "The next question is, do its liabilities go into the Pensions Protection Fund (PPF)?"

This is now the main bone of contention. Having already agreed to compensate the workers of other firms which have gone bust leaving a pension deficit, through its Financial Assistance Scheme (FAS), it had been widely expected that the Government would also end up footing the bill for T&N.

However, in a last-minute amendment to the Pensions Act last month, the Government opened the door for schemes such as T&N to dump their liabilities on the PPF - a privately funded pensions lifeboat which is set to launch in April. Mr Ralfe estimates that the T&N pension scheme will not receive much more than £100m from the liquidation of T&N's UK assets. As a result, the PPF will be landed with liabilities of some £400m within months, maybe even weeks, of its creation.

Christine Farnish, the chief executive of the National Association of Pension Funds (NAPF), says the cost to pension funds is set to soar as a result of T&N - a fact which most schemes have not yet woken up to. "I don't think most companies can know what's going to hit them in terms of the cost of the PPF," she says. "T&N is a huge scheme, and I doubt that any of the Government Actuary Department's calculations took account of the possibility of a scheme that size being landed on the fund."

While the members of the PPF and NAPF are likely to lobby hard over the coming months to avoid having to pay up for T&N, Hugh Arthur, the head of pensions for the City law firm Macfarlanes, believes there is little they will be able to do.

But he remains more upbeat about the PPF's ability to manage such a large liability from day one. "People have been looking at this in terms of a one-off global liability," he said. "But it is possible the PPF would be able to meet its liabilities on an ongoing basis. The problem is, you have to keep your fingers crossed as to what's going to happen in the future."

Analysts believe that after asset sales T&N may have a pension deficit of £400m. But Mr Arthur points out that £400m is not needed tomorrow. By using the scheme's existing assets, he suggests the scheme could be run off over a number of years, minimising the cost to the PPF.

But this plan is only viable in the absence of any other major pension crises over the next few years. Mr Ralfe believes running the PPF on such a basis would also be fundamentally wrong for what is ultimately a commercial private-sector project.

"I think the Government's idea of the PPF is that it can be run on a pay-as-you-go basis - as long as it pays this year's pensions it's all right," he said. "But what they're missing is that the pay-as-you-go concept doesn't work if you're trying to do it commercially."

The full implications of the Government's move to sidestep the cost of T&N will not be realised for several months. But it has been suggested that the Government's decision to make such a serious U-turn on the PPF could also merit an official inquiry.

The one saving grace of the Government's erratic pensions legislation, however, is that the workers of T&N seem likely to emerge with their pensions intact.