Jeremy Warner's Outlook: Varin has done well with Corus, but when the steel cycle turns, what will he do for an encore

Pension débâcle: too late for action now
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The Independent Online

The sale announced yesterday by the Anglo-Dutch steel maker Corus of its aluminium assets for £826m is filled with ironies. Three years ago, failure to sell these very same assets cost the then chief executive, Tony Pedder, his job. About the only thing the company had going for it back then was the surplus in its pension fund, which almost uniquely for a FTSE 100 stock, persists to this day, thanks to the low life expectancy of steel workers.

In all other respects, it looked a busted flush. Not even the boom in China then getting under way seemed capable of rescuing this relic of the British steel industry from the corporate scrap heap. At just 3.75p, the share price reflected it too. The man Mr Pedder was trying to sell to was one Philippe Varin, then with the French aluminium producer Pechiney. Today Mr Varin is chief executive of Corus, and it is not just with the aluminium interests that he's succeeding where Mr Pedder failed.

He's also managed to get two years of profitable trading under his belt, which for those who remember British Steel's propensity to collapse into ruinous loss the moment there was a cyclical downturn in the economy is quite an achievement.

The shares too have recovered much of the ground lost in the last downturn. Back then, Mr Pedder was defeated by a combination of the supervisory board that looked after the interests of Corus's Dutch arm, and the related works council, both of which believed the assets were being sold only to pay for the bottomless pit of British losses.

This time around the supervisory board has agreed, though there are still mutterings of discontent from the works council, which disapproves of the break-up of the aluminium interests implicit in the sale to Aleris International. Even so, we have to assume that it's already largely a done deal, but what does Mr Varin do for an encore?

Mr Varin would like us to think that the turnaround achieved over the last three years is all down to his "restoring success" programme of restructuring, and to some extent it is. He's on track to deliver all the cost cuts promised, and he's gone some way to closing the competitive gap with European rivals.

However, much of the improvement is the result of soaring prices, which in turn have been caused by the boom in China. Mr Varin has also had the following wind of favourable exchange rate movements. The pound has been relatively strong against the dollar, in which most of its raw materials are priced, but weak against the euro, in which most of its sales are priced.

But what happens now? A cyclical downturn of the type we've seen so often before, plunging the company into fresh crisis, seems all too possible. Prices have begun to ease markedly over the past six months. Demand from China is beginning to abate, and in any case, rapid growth in China's own steel industry is fast removing the need for imports from the rest of the world. Against that, demand in the US remains robust and it continues to recover in Europe.

Yet to believe the steel industry is finally freed from its cyclical past would be a triumph of hope over experience. Worryingly, Corus's competitive gap with others has been widening again in recent months, thanks to higher energy prices. This doesn't bode well for the company's prospects in a downturn.

Corus's relatively small size in a fast consolidating global steel industry makes it an obvious target for others. If Lakshmi Mittal fails with Arcelor, Corus might be next on his hit list. Politically, Corus would be less of an uphill struggle than Arcelor, even if shareholders might prove equally uncomfortable with Mittal paper.

Alternatively, Corus might fancy the role of consolidator itself, chosing to buy or merge with one of the low cost producers of India or Brazil. That really would be back to the future. Another of Mr Pedder's failures was a planned merger with CSN of Brazil, which collapsed in mutual acrimony in 2002.

Pension débâcle: too late for action now

Saying no to 85,000 pension scheme members who have just been stripped through no fault of their own of the prospect of a comfortable retirement is hardly the most appealing of political tasks. In the circumstances, John Hutton, Secretary of State for Work and Pensions, managed it as well as could be expected, yet though the decision may be defensible from the taxpayer's point of view, the political damage is likely to be considerable.

It may sound callous, but on purely practical grounds Mr Hutton is right to reject the Ombudsman's findings of maladministration. Whether he's also right to deny reasonable compensation in circumstances where there is a strong moral case for compensation is a different issue. The Government's handling of the crisis also seems to have been particularly cack-handed and has in all probability made a bad situation even worse. The fallout could yet prove disastrous for Labour as it seeks to decide the future of pensions.

I deliberately didn't comment on the affair when the Ombudsman's findings were published on Tuesday because I wanted to see the detail of the Government's response first. This we had yesterday, and I have to say that many of points Mr Hutton made seemed soundly based.

No government can accept responsibility for the financial collapse of private sector pension schemes whether or not it has encouraged people to participate in them. There is no evidence that the literature published by Government led to the losses suffered by members of these schemes, nor can it be right that the taxpayers should shoulder the costs when no causal link has been established.

Where the Government does seem to have got it wrong, however, is in the way it has dealt with the problem since it began to become apparent. With a less blinkered approach, the problem wouldn't have been nearly as bad as it is.

The Government has already acknowledged the case for some form of help through the Financial Assistance Scheme, which has been given £400m of funding. Its reasons for not going further seem to be less on principle than on cost. Mr Hutton yesterday estimated the costs of meeting the Ombudsman's recommendation of 100 per cent compensation at £13bn to £17bn.

On further enquiry, it turns out that this estimate is based on the present cost of buying a full annuity for all affected members. No trustee in his right mind would adopt such a needlessly expensive approach to providing pensions to his members.

Instead, the available assets would be managed for run-off, leading ultimately to a much less costly outcome. In the case of collapsed pension schemes examined by the Ombudsman, the cost could conceivably be less than half the Government's estimate, or little more than £100m a year. Even if the Government provided no compensation at all, the lot of most disadvantaged pensioners could be greatly improved.

So why hasn't the Government seen fit to go this route? When asked yesterday, the Department for Work and Pensions gave the following response. "Halting annuitisation would be impractical, as many schemes have wound up or are already at advanced stages of wind-up.

"Also for those that are still winding up, the trustees have already committed to arrangements with annuity providers, which would make reversing the annuitisation process costly and possibly detrimental to all scheme members".

Fine, accept that the Government was urged to halt the ruinous process of annuitisation as far back as 2003, but chose to ignore it. And would the Pru and Legal & General, the two monopoly providers of bulk annuities, really charge for reversal of the annuitisation process given the publicity that surrounds this affair? I doubt they'd dare.

For these failings alone, the Government deserves to be made accountable. The root of the problem, though, is a more intractable one. The Government's repeated attempts at surgery on the ghastly mess that is the pensions landscape has made it almost wholly gangrenous. On the available evidence, there's little reason for thinking ministers might get it right on the Turner proposals.

j.warner@independent.co.uk

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