UK Coal 'to be taken over by state pension fund'

The state looks set to take over the bulk of Britain's coal mining industry through a deal by the Government's Pension Protection Fund (PPF).

UK Coal, the struggling rump of the once-nationalised British Coal, is expected to enter administration in the next few days, at which point the PPF is likely to take on the assets along with an estimated £550m pension liability.

The deal would save 2,000 jobs and ensure the mines keep running, but is thought likely to see the pensions of 7,000 current and former workers cut by about a quarter.

A spokesman for the PPF confirmed that it was "one of a number of parties involved in discussions about future operations at UK Coal".

"Our role is to protect the interests of the pension scheme members and minimise any resulting costs to our levy payers," he added.

UK Coal has been suffering financial problems for months and was restructured last year following a fire at the Daw Mill pit in Warwickshire. The company, owned by the miners' pension scheme, operates two deep mines and six surface mines under the banner of UK Coal Operations.

The PPF was set up by the Government 10 years ago, funded through a levy on pension funds. It is responsible for bailing out struggling pension schemes, but it is rare for it to take control of the companies behind them.The deal is thought to be the biggest rescue the PPF has taken on. Nortel, a telecoms company, had a £1bn scheme, but taking into account its assets the potential liability in the PPF's books was £333m.

The blaze at Daw Mill cost the company £100m worth of equipment and £160m of coal, and left it with £35m of other costs.

The deep mines are at Kellingley in Yorkshire and Thoresby in Nottinghamshire.

The problems at UK Coal continue the long-term decline of Britain's coal industry, with production falling steadily since it peaked at 292 million tonnes of coal a year in 1913. By the time it was nationalised in 1947, the industry's output had already declined to 200 million tonnes – from 1,038 mines – and the beginning of production of North Sea gas in the 1960s provided power producers with an alternative source of energy.

By 1983, just before a further raft of pit closures prompted the miners' strikes, production was down to 120.8 million tonnes at 308 mines.

In 2011 the industry, re-privatised in 1994, produced 17.8 million tonnes at 52 pits with just 6,419miners – a monumental decline from the 470,000 employed in 1947.