Rover is a dead parrot, so why does everyone persist in believing it might be saved?

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The Independent Online

So who's going to keep Rover alive this time? Why, Shanghai Auto and Nanjing Auto, the very same Chinese companies that pulled the plug in April, after looking into the black hole that was Rover's balance sheet and deciding they didn't like what they saw.

Three months on Rover is a different proposition. It is shorn of both its pension deficit and its 6,000 strong workforce. In fact, there are no liabilities to worry about at all as PricewaterhouseCoopers has already told creditors they can whistle for the £1.4bn they are owed.

Picking up Rover free of all its liabilities is one thing. Making a go of it is quite another. Europe already has enough capacity to make four cars for every three it can sell, so why anyone, even the Chinese, would want to buy an ageing plant like Longbridge is a mystery. The fact is that Shanghai Auto is basically only interested in the engine line, which it would ship back to China, while Nanjing, despite its protestations to the contrary, is hardly likely to maintain significant car production in Birmingham when it can manufacture for a tenth of the price back home.

The former MG Rover workforce had one piece of good news yesterday - they are going to qualify for the Government's Pension Protection Fund. But the idea that Longbridge might again survive to re-create a home grown car industry, looks fanciful, as well as being a cruel illusion to perform on those who lost their livelihoods three months ago.

Primark piles on pain for others with buy

Ask Peter Simon, the chairman of Monsoon, what the secret of Primark's success might be, and he would no doubt reply that it is copying Monsoon's designs, getting them knocked up for next to nothing somewhere, and then selling them at a fraction of the price. Primark has already paid compensation to Monsoon for just such an offence and is currently being sued by Mr Simon for allegedly passing off six other Monsoon designs as its own.

Whether the case sticks or not, Primark is a high street phenomenon whose success is an increasingly painful thorn in the side for rivals. The prices, as George Weston, the chief executive of Primark's parent company, Associated British Foods, observes, are "gobsmackingly low", and with a little help from Monsoon, even the fashion clothing isn't as downmarket as it used to be.

It is the growth of Primark, and discount retailers like it, which helps explain why Marks & Spencer and others are in so much trouble. Why go to M&S, when there is a perfectly respectable alternative blouse, skirt or pair of children's shorts available at half the price round the corner at Primark? In the half year to end of March, Primark achieved a 6 per cent increase in like-for-like sales. Few others of any size can boast such a performance. M&S is this week expected to report a fall in first quarter sales of at least 4 per cent.

With the acquisition by Primark of 120 Littlewoods stores from the Barclay brothers, the competitive environment on the high street is about to get even tougher. Primark plans to retain only about 40 per cent of this additional selling space, but even so it will expand the effective size of the company by about a third, giving it more comprehensive national coverage and creating still greater efficiencies. No wonder ABF is predicting that by the end of next year Primark will be the largest part of the group, eclipsing its Silver Spoon and Twinings tea divisions.

Primark has tried at least once before to buy the Littlewoods stores, which plainly had no long-term future within the Barclay's fast-expanding mail order and home shopping business. As a retailer, Littlewoods was also an increasing irrelevance, a bit player on the high street which still struggles to break even. Selling to Primark has long made perfect sense; it was always just a question of agreeing a price.

As for Arthur Ryan, Primark's publicity shy chief executive, this latest investment by the Weston family and its backers in his creation has made him no keener to seek the limelight. It was George Weston who was doing all the talking yesterday. Yet it is Mr Ryan, now 69, who can take much of the credit.

Hoping for the best on pension deficits

John Ralfe is the pensions expert widely credited with switching the Boots pension fund out of equities and wholly into bonds, a decision which with the benefit of hindsight looks extraordinarily astute.

The Boots pension fund has since ventured back into equities, but by switching when it did, it managed largely to avoid the value destruction of the bear market and emerge with a relatively solvent pension scheme. Mr Ralfe, having parted company with Boots, has gone on to become something of a high priest for bonds in the fixed income versus equities debate. One rival describes him as "preaching the case for bonds with all the passion of the zealot".

Obsession is a master of discovery, and Mr Ralfe manages to produce a consistently thought-provoking output of work. His latest piece of research, for RBC Capital Markets, makes the point that despite the recovery in equity markets and a generally healthier level of contributions by companies, the pension liabilities of FTSE 100 companies are still rising - thanks largely to improved longevity - and the combined deficit therefore remains stubbornly around the £60bn mark.

But much more worrying, from Mr Ralfe's standpoint, is that these liabilities continue to be more than half backed by equities. Less than one-third of them are backed by bonds and property. According to Mr Ralfe, these bond assets are far too low even to fund pensions in payment, let alone the long-term pension promise to those still in work. Regular readers will know of my quarrel with Mr Ralfe over the proportion of equity investment held by pension funds.

Equities are more volatile than bonds, but over time they have consistently produced a better rate of return. It therefore makes sense for companies to attempt to fund their long-term pension liabilities from equities. Mr Ralfe's point is that even accepting there's a case for funding future pensions with equities, pensions in payment need to be paid for out of less risky assets such as bonds.

Assuming Mr Ralfe has got his numbers right, for there are no hard and fast figures on what proportion of liabilities are pensions in payment, then UK pension schemes need to make a further switch amounting to a jaw dropping £125bn out of equities and into bonds.

Many companies are just hoping for the best in believing that a high level of equity holding can eventually plug the deficit, he observes. Well maybe, but we live in the real world and to crystallise a deficit by switching out of equities into bonds at a time when it is perfectly reasonable to think bonds a worse investment risk than equities doesn't look a particularly sensible strategy to me.

Solvent companies will always meet their pension liabilities; to force them into an investment strategy which is likely to be more costly than the alternative - waiting for equity markets to recover - is a perverse response to the problem. Likewise to force more financially constrained companies into a safety-first investment approach might just push them over the edge. In the absence of realistic alternatives, the hope for the best approach may be the best.