PowerGen faces pounds 39m pension bill

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PowerGen is facing a pounds 39m bill from its company pension scheme in the latest twist to the long-running row over the use of pension fund surpluses in the privatised power industry. Chris Godsmark, Business Correspondent, reports on claims that PowerGen breached new rules which safeguard pension fund assets.

The setback for PowerGen follows the unsuccessful legal challenge earlier this year by National Grid and National Power pensioners, who claimed the companies had acted unlawfully when they used pension fund surpluses to help fund redundancy payments after privatisation.

Though the judge ruled against the pensioners, he also questioned the way National Power had spread the extra pensions cost of its redundancy programme by paying money into its fund in installments.

National Power reduced the cost to the company by offsetting any outstanding cash due against huge surpluses in its pension fund identified by actuaries each year.

It has since emerged that a further 10 power companies, including PowerGen, also used installments to spread their redundancy costs.

This policy has been challenged by Coopers & Lybrand, auditors to the PowerGen scheme and the Electricity Supply Pension Scheme, the industry- wide umbrella fund created at privatisation.

The annual report of the PowerGen fund, which has just been published, says pounds 39.1m of payments were outstanding at the end of March because of the way the company had spread the cost. The new advice by Coopers means the company could be forced to repay the cash as a lump sum, rather than offsetting the liability against any surplus discovered at the next valuation in April 1998.

The 11 companies affected by the auditors' ruling, including National Power and PowerGen, could have to pay a total of pounds 115m into their pension funds. However, PowerGen has the biggest deficit to make up.

Coopers said the latest legal advice argued that the company should have consulted the pension fund trustees before deciding to pay in installments. This new advice superceded previous legal opinions, which said the company did not need to tell the trustees. The auditors said the pounds 39m deficit also breached 1996 rules on investments held by occupational pensions schemes, because it was being being classed as a loan from the pension fund to the company.

The scheme report said the fund's trustees were "initiating discussion with PowerGen as to how the situation is to be remedied".

Lawyers acting for the industry are due to give a final verdict on the auditor's opinion in the new few weeks.

Meanwhile the National Power and National Grid pensioners are preparing to appeal against the High Court judgement.