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Utilities fear pounds 5bn bill after call to return pension cash

Chris Godsmark Business Correspondent
Monday 09 December 1996 00:02 GMT
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The chief executive of one of the privatised regional electricity companies has warned that a landmark ruling by the pensions Ombudsman, which called for electricity employers to hand back surplus cash removed from their pension schemes, could have as big an impact as Labour's planned windfall tax.

It emerged last week that Dr Julian Farrand, the Ombudsman, had provisionally told National Grid to return almost pounds 44m it removed from the Electricity Supply Pension Scheme, the umbrella body for schemes run by all the privatised firms including power generators. The cash represented about 70 per cent of a surplus identified after a valuation of the Grid's portion of the scheme by actuaries in 1992. Dr Farrand said the Grid had misused the surplus because the rules of the scheme blocked such payments to the employer.

Other electricity companies have since been anxiously taking legal advice on the judgment, which could mean their having to hand back up to pounds 1bn. This could raise serious questions for CalEnergy. The US group is bidding pounds 782m for Northern, which is thought to have taken a substantial portion of the pounds 83m surplus arising at the last two valuations of the company's pension fund.Any repayments would hit the net worth of Northern.

Surpluses of some pounds 500m were removed by electricity employers after the 1992 valuation, including pounds 176m thought to have been used by National Power to fund early retirement benefits for staff.

Another valuation in 1995 identified a further surplus of about pounds 650m, of which the majority is also thought to have been taken by the employers. Peter Woods, the solicitor from Stephens, Innocent who represented the Grid pensioners, was convinced the ruling would also apply to last year's valuation. "The rules of the scheme haven't altered at all between 1992 and 1995, so the Ombudsman's judgment has to have the same impact in both cases. There's no question about it."

One regional electricity company, which did not want to be identified before the Ombudsman gave his final warning early in the new year, predicted the judgment would cause turmoil in the industry.

The company's chief executive said: "This ruling is nonsense. It's the employers who have to make up any shortfalls in pension funds so it's only right that employers also get the bulk of any surpluses."

He said the only way to return the cash would be for electricity companies to take on huge amounts of extra debt. The impact would be similar to Labour's windfall tax on the privatised utilities, which is widely expected to raise up to pounds 5bn.

The company also warned that the industry would have to slash redundancy payments to staff in the future. He explained: "The surpluses help the RECs to make generous redundancy pay-offs, generally of the order of two years' salary. This was the only way we could cut thousands of staff as quickly as we did. There's just no way we could continue with that if we couldn't use the surpluses."

National Grid has until 17 January to respond to the Ombudsman, but unless it can come up with new arguments his final ruling is likely to back up the provisional judgment. The Grid would then be certain to take the issue to the High Court, in an attempt to protect its shareholders.

The sharing of pension fund surpluses always lead to complex negotiations with pension scheme trustees. Final salary schemes make a promise of a pension directly related to an employee's earnings, usually measured in the last three years before retirement, and this means the fund is at risk of having to find a lot of money from somewhere if investment performance is not up to scratch.

Separately, Labour claimed yesterday that the Government had admitted in a Commons reply that gas, water and electricity bills had risen 13 per cent in real terms since 1979, and 3 per cent since the completion of privatisation in 1990.

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