A spokeswoman said the subsidy would be paid by the Exchequer, but last night it emerged that the Government could claw this money back from British Coal's staff pension fund through a circuitous route.
British Coal confirmed that the Government had asked the company to consider withholding pounds 109m due to be paid yesterday into a fund for staff who have previously been made redundant or who took early retirement. The payment is one of annual instalments agreed in 1983, to be paid by BC as enhanced pensions for redundant staff as part of an ongoing redundancy package.
A total of pounds 481m is outstanding. However, as most of the money is reimbursed by the Government, if BC withholds payment it will be a saving of pounds 481m to the Government.
A BC spokesman said: 'The decision to propose deferral of the staged payments wasn't technically a government instruction but the Government, as a shareholder, did invite British Coal to look at the question.'
BC is proposing to pay the pounds 109m deferred payment from its pounds 400m share of the pounds 1bn pension fund surplus and is seeking a ruling in the High Court to decide whether this is legal under the pension fund's trust deeds.
In the past BC has not removed any surplus from the fund; the money has remained in the fund, gaining interest, and BC has enjoyed pension contribution holidays instead.
The trustees are enraged by the proposal and have been advised that it would be illegal. Unless BC backs down, the dispute will inevitably end up in the courts, probably within a few months.
Denying there was any link between the pension fund and the government subsidy to BC, the DTI spokeswoman insisted the subsidy would be paid by the Exchequer. A sum of pounds 500m over five years was recommended by the Trade and Industry Select Committee, to make British Coal's coal competitive with world market prices.
Michael Heseltine, President of the Board of Trade, has been challenged in letters to explain the Government's involvement in plans to raid the pension fund.
Richard Caborn, chairman of the all-party Trade and Industry Select Committee, has asked Mr Heseltine to confirm whether the Government had promised to indemnify BC against any legal costs incurred in fighting its pension fund trustees.
And Martin O'Neill, Labour energy spokesman, has asked whether the Government encouraged BC to use the pension fund surplus for payments to redundant staff.
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