Outlook: Up pops Nats as yet another headache for Byers

Pension mayhem; Saxby's disposal
Click to follow

If it were not for the fact that he carries so much of the blame, you would almost feel sorry for the man. Stephen Byers, our beleaguered Secretary of State for Transport, seems to be living proof of the old saw that when one thing goes wrong, almost everything goes wrong all at the same time. So many controversies have engulfed him since he got the job that it's hard to keep up. Forget the fiasco of Railtrack, Jo Moore and the PPP for the Tube, another now looms in the shape of National Air Traffic Services (Nats).

Mr Byers insisted on pushing ahead with the part privatisation of Nats last summer against the advice of the Civil Aviation Authority, which predicted that the business plan would crash land in the event of an airport disaster or deep recession. In the end we got 11 September instead, the effect of which on air traffic was quite as bad as any airport disaster. A cash crisis has inevitably developed, and bankers will tomorrow formally threaten to call in administrators unless the Government comes up with enough money to tide the company over its immediate problems.

Nats was all along an unpopular and unnecessary privatisation. If there's one business which cries out to be a public sector activity, it is control of the skies, with its obvious implications for safety and national security. Mr Byers may only have been obeying his master's voice at the Treasury, but he was absolutely determined that Nats should be a show case of public private partnership.

The big airlines, or rather their bankers, were persuaded to put up £750m for a 46 per cent stake, and it was all hailed as a shining example of private sector money for public sector work. Only one problem. It is the public sector that will have to carry the can now that things have, as predicted, gone wrong. Mr Byers could not have imagined his "off-balance sheet" finance would so quickly boomerang back at him, but then everything he touches seems to do much the same.

Pension mayhem

Never did accountancy seem so exciting, even though for the beleaguered professionals who do it for a living, it is all the wrong reasons. Both Enron and Global Crossing are accounting scandals of huge proportions, and not since the early 1990s have accounting practices in general been subjected to so much public scrutiny. All of a sudden the stock market is bewitched by the idea that inflated revenues and hidden liabilities are everywhere.

After off-balance sheet finance and hollow swaps, this week's big debating point is FRS 17, the accounting standard which forces companies to recognise pension fund deficits on their balance sheets and reflect this through through the profit and loss account. ICI, British Airways, British Telecom, there are few big corporate names likely to escape entirely unscathed.

FRS 17 is not yet required accounting practice, but it soon will be, and as such it has become the excuse of choice for worn down finance directors as they close their defined benefit pension schemes to new members, or just plain close them down altogether. It's that wretched new accounting rule, they are prone to say as bang goes the old perk of final salary pensions. In fact, other than serving as a wake-up call FRS 17 has got little if anything to do with it.

Companies are closing their final salary pension schemes because people are living longer and because of declining rates of investment return, which in turn makes defined benefit pension schemes more expensive to fund. The other reason is an act of government vandalism in Labour's first year of office, when it removed pension funds' tax-exempt status on dividends. At the time, stock prices were rising strongly and many funds were still apparently in surplus, so nobody much complained, but with the benefit of hindsight, the measure pretty much holed the pensions industry below the water line.

FRS 17 is only significant because it is forcing companies to recognise a looming deficit in their accounts, whereas in the past, when less stringent standards ruled, it would have remained largely hidden. That's certainly concentrated minds on the problem, but it hasn't caused it, and indeed it's hard to argue that it might have been better to have kept the whole thing swept under the carpet.

That's not to say that FRS 17 is beyond criticism. There is no exact way of quantifying a pension fund deficit, and it is not clear that FRS 17, which requires companies to assess pension liabilities by reference to low yielding corporate bonds, provides the right solution. What it does do is make a potential liability wholly transparent, but it doesn't necessarily mean the liability is going to crystallise. In any case, if applied vigorously, it's going to kick quite a hole in the finances of many companies, undermining profits at a time when they are already under severe pressure, and endangering banking covenants.

Bankers have always maintained that covenants broken as a result of the introduction of a new accounting standard won't count. FRS 17 will sorely test the principle, for although it's only a number on the balance sheet, it serves as a sharp reminder that many companies dramatically slimmed by competition and product obsolescence still face pension liabilities that reflect past glories and dwarf the company's present size.

Saxby's disposal

Sir Robin Saxby, chairman of Arm Holdings, has taken umbrage at our report in Saturday's edition that he has sold 667,000 shares in his company at just over 300p a share, and that this might presage, in the way that director's share sales often do, trouble ahead. As to this latter point, we sincerely hope it doesn't, but repeat that as the most highly rated share in the FTSE 100, Arm may be vulnerable to setbacks.

In any case, Sir Robin says through his public relations advisers, we should have checked the facts. In fact he sold "only" 500,000, and the balance were "gifted" to the University of Liverpool. We are happy to clarify this point for Sir Robin, as indeed we are the tax position on such transfers, just in case Sir Robin's advisers haven't alerted him to it.

By gifting the shares, as opposed to the proceeds from selling the shares, Sir Robin avoids capital gains tax on the transaction. The value of the shares is meanwhile allowed for offset against Sir Robin's income tax, which should make it a highly tax efficient exercise all round. This is, of course, as it should be, for businessmen should be encouraged to endow universities with money.

j.warner@independent.co.uk

Comments