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April 15, 2005

Helping the Workers.

The Rover fiasco shows no sign of getting any better, indeed it seems perfectly designed to show up all the accumulated faults in our system of corporate management.  Now don’t get me wrong here, I fully support the idea that pension and redundancy rights should be protected, in so far as the company is actually capable of doing so. If a business cannot pay the redundancy pay it is technically insolvent and has to try and do something about it. Pension funds deficits have claims upon the business ahead of shareholders and many types of debtors. All fine with all of that. Yet there can come a point when a business is simply bust, and  at that point the question is not how to protect  such accumulated rights at all.

Rather, the question becomes what and how much can we salvage from the wreckage? OK, it’s failed, shareholders have lost all their capital. Debtors are in a queue, with the pension fund at the head followed by the ranking of secured debt, unsecured, senior to junior. (In the Rover case there are no banks as they would not lend to it at all, no bonds outstanding that I know of.)

So, in a rational system of bankruptcy law, the administrator would look at the business, flog off what he could for what he could, then divvy up the pot between the various claims. No claims follow to the buyer of the business, as that’s precisely what bankruptcy is there for, to pull whatever is of value out from underneath accumulated claims. It’s a vital part of the creative destruction process, at the very heart of the Anglo Saxon style of capitalism. (You can object to that very system all you wish, that isn’t my point here. It’s that if we are to have it then we have to have this style of bankruptcy law.)

So, what’sthe situation with Rover? Now it’s bust, the administrator sells off the MG line say? Uses whatever he gets to fill the pension fund hole and a bit of redundancy? Ah, no, a well meaning piece of legislation has mutated over the years so that one cannot draw a line under the debts. The redundancy and pensions owed will follow anyone who buys the assets. Meaning, of course, that no one will buy the assets.

Yesterday it became clear that if the Chinese did the original deal now, and took on 3,000 Rover workers as well as the Rover production line at Longbridge, it would have to pay for the cost of sacking the remaining 3,000.

One source close to SAIC said: "If we wanted to pick up the business and some employees, the cost of redundancies, pensions and warranties will follow us around like a bad smell." An SAIC spokesman added: "We remain highly unlikely to do anything while MG Rover is in administration."

Employment experts said that the TUPE rules - Transfer of Undertakings (Protection of Employment) Regulations 1981 - were an obstacle for the Chinese, and any other potential buyer while MG Rover was in administration.

Tony Thompson, employment partner at City law firm Macfarlanes, said: "If the transfer happened tomorrow and the administrator sacks 3,000 and 3,000 went to the Chinese, the liabilities for the redundancy costs of the sacked 3,000 would transfer to the Chinese."

Steve Treharne, an insolvency partner at KPMG, said the rules, which are intended to protect employee rights, had changed a great deal since they were introduced 24 years ago.

In 1980s, a buyer would be able to use a time "buffer" to buy a collapsed business and avoid being caught by TUPE.

Mr Treharne said: "We used to be able to lay off all the employees at 10am, sell the company at 12pm. That was deemed to be a 'break' and then they could all be rehired without the liabilities. But it has become more and more difficult to lay off employees and sell on a slimmed down business."

Something of a lesson in one of the basics of economics, that there is no such thing as a free lunch. In this case, that adding to worker protection has in fact reduced employee welfare, as the rules to protect them mean that there will be no employees.

April 15, 2005 in Economics | Permalink

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Comments

The problem here is one of property rights, not really worker protection, though. The pension fund claims are protected because the pension fund is a separate legal entity from the company. The workers have made contributions (or had contributions made on their behalf) to a trust, and the trustees of that trust have very specific duties. So the pension fund liability isn't a normal liability at all; it represents assets that Rover ought to have transferred into the fund years ago but didn't because it was following the normal process of smoothing contributions. So the reason that the "assets" can't all be sold off in insolvency without the pension fund being involved is that some of theose assets are effectively owned by the pension fund; they aren't Rover's to sell.

Tim adds: So far as the pension fund is concerned, correct. Now, about the redundancy rights?

Posted by: dsquared | Apr 15, 2005 10:24:39 AM

It seems the redundancies are being paid for by our taxes. To quote the BBC "Prime Minister Tony Blair said £150m was being made available to help those being made redundant at MG Rover and the companies that supply it." Maybe the taxes will pay for the pensions too - apparently there is a fund for such things.

Tim adds: Statutory redundancy (a weeks wages per year worked or something like that) will indeed be paid by the taxpayer. Pensions? A new fund came into being a week or two ago, where they will pay basic pensions (but not full pensions) to people if the company pension fund goes bust. This is funded by a levy on other pension funds, not by the taxpayer.

Posted by: lascivious | Apr 16, 2005 12:03:02 AM

Many years ago (when, I seem to recall, Norman Fowler was one of Thatcher's Ministers of State), we were promised portable pensions etc.

Now pensions, particularly those where workers have paid-in, ought to be truly sacrosanct and not a corporate asset to raid, as they see fit.

One of the greatest problems (which has led to many of the current problems), were the strategies employed by such as Lord Hanson, in his hostile M & A (Mergers and Acquisitions) activities: raiding the pension fund (all you need is a tame actuary, willing to certify that your fund is "Over-Funded") and you can take-out millions - thus cutting the cost of the acquisition - and worse, declaring a "Pension Holiday", thereafter: on the same grounds of over-funding.

Since a pension (Contributory or Non-Contributory) is part of a worker's statutory contract of Employment, it is about time that such abuses were addressed.

If we take the US example, when many corporations went into Chapter 11 or 13 bankruptcy, over the past five years (airlines are an excellent example), corporate raiders waited until the liquidaters sold-off the assets and "Cherry Picked" what they wanted. Same with the US steel industry. Also, what is left of Turner & Newell and Ferrodo, both owned, vicariously through a US holding Corporate Raider billionaire, Carl Ican.

The FPGC (Federal Pension Guarantee Corporation) were there, in the wings to pick up the pieces: so far so good. It operates on the same basic premises as the new UK Pension protection Fund (PPF), taking a levy from all corporate pension schemes.

Trouble is, with the high claims experience, the US FPGC is nearly bankrupt itself!

The Rover claims will effectively destroy any funding expectancy of the PPF, within two weeks of its launch!

And of course, SAIC would be foolish to make any move, until and unless the assets are liquidated: who can blame them?

With statutory redundancy paid by the taxpayer, seems like we're stuffed again!

Read my in-depth analysis here:
http://www.axisoflogic.com/artman/publish/article_16932.shtml

MCF

Posted by: Michael C Feltham | Apr 20, 2005 10:53:01 PM