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August 19, 2005

Kvaerner Pensions.

This little story has me worrying. Seriously, I do hope that I’ve got the wrong end of the stick here.

The head of Kvaerner ASA, the Norwegian construction company, could be personally liable for more than £1billion of pension obligations relating to the UK division of the business, it emerged yesterday.

How can a liability of a limited company end up as the personal liability of the head of the holding company? Are they suggesting that he pocketed the money himself? No:

sold the UK business for £1 just days before the new Pensions Act came into force.

Members of the Kvaerner pension fund in the United Kingdom, a final salary scheme that has a £245m deficit on its £1.2billion of liabilities, accused Mr Rokke of cynically off-loading the fund and reported him to the pensions regulator.

They are concerned that responsibility for their pensions has been transferred from a successful company to the five directors involved in the management buyout.

Yesterday, a spokesman for the regulator declined to comment on the case specifically, but said: "If there was some sort of transaction which was done to deliberately avoid pensions liabilities then we are able to serve a contributions notice on any individual who is connected to that transaction."
John Ralfe, an independent pensions consultant, said: "The regulator's power is pretty broad. He can go after anyone who he thinks has deep pockets. He will be duty bound to have a go, because otherwise foreign parties could simply walk away."
"Kvaerner ASA has never been financially responsible for the pension fund. It is companies owned by Kvaerner Plc [the UK division] which have employees in the plan and which can be asked to contribute should the pension fund be unable to meet its commitments to its members," it said.

Now here’s what worries me. The limited liability company is the very bedrock, the engine, of the modern economy. It’s the only way we’ve ever really found that enables many thousands to club together to finance a business or project. Now, as part of a change in pension law, the UK seems to have abolished this concept. The Pensions Regulator can "go after anyone with deep pockets". That is, instead of potential losses being limited to the amount invested, all those involved with the company are jointly and severally liable. Large corporations have been turned from limited liability companies into partnerships, with each and every investor responsible for all (perhaps only just the pension liabilities, but the concept is the same) debts incurred.

That is, that limited liability no longer exists and the entire method of financing the modern economy is dead.

Please, somebody tell me I’m wrong, that it’s me that has misunderstood this, not that the new pensions laws effectively eviscerate capitalism?

August 19, 2005 in Economics | Permalink


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It's always been possible to "pierce the corporate veil" and go after directors individually if they have acted cynically or negligently in order to abuse the protection of the joint stock company. For example, if I set up a company with £1m of capital and borrowed £100,000 from you, then paid myself a dividend of £1.1m and had the company put into receivership with no assets, then you would sue me and you would win.

I have no idea about the specifics of this case and they are all talking hypothetically anyway, but if somebody disposed of corporate assets in an inappropriate manner to try and avoid a UK pension liability, it doesn't strike me as beyond the bounds of reasonableness that he could end up getting surcharged for it. All that's happening here is that pension fund debts are being put on a proper legal basis as the liabilities they are rather than being treated as "employee benefits" as if interest payments were "creditor benefits" and ownership was a "shareholder benefit".

Posted by: dsquared | Aug 19, 2005 9:31:06 AM

Tim, I'm afraid so, the corporate veil is expressly pierced by the Pensions Act 2004. Not only in respect of the deliberate avoidance of pensions debts but group-wide if the actual employing company is "insufficiently resourced".

dsquared, I don't really think that your example holds up - that's just fraud pure and simple for which directors have always been liable.

Posted by: a pension consultant writes | Aug 19, 2005 11:04:34 AM

It is not just limited liability that is at stake. The powers of the new regulator significantly hinder the possibility of corporate takeovers, which presumably is great news for incompetent managers.

Posted by: Johnathan | Aug 19, 2005 3:17:07 PM

pension consultant: but selling a company with an insolvent pension fund with the intention that the purchaser defaults on the pension liability is also fraud pure and simple. All that's happening here, as I say, is that pension fund liabilities are being put on the same legal footing as debts.

Tim adds: No, not true. A holding company can (and very rarely does) repudiate the debts of subsidiaries. Only if those debts are guaranteed or secured by the holding company can a legal (as opposed to a moral or for reasons of business expediency, reputation etc.) requirement to cover them exist.

Pension liabilities have now moved from that class, simialr to debts, to a situation where the holding company is liable, whether they have guaranteed or secured them or not.

That is a huge change in the rules of limited liability.

Posted by: dsquared | Aug 19, 2005 3:53:17 PM

Johnathon, there is a clearance procedure, like the Takeover Panel stuff, which means that deals will still get done. They will be more complicated of course, which is terrible news for advisers like me.

dsquared. In a moral sense you might be right but legally, until 11 June 2003 to be precise, UK law expressly permitted employers to walk away from their pension obligations, and to be fair employers might not have entered into these obligations had this not been the case.

Of course, pension deficits have always represented a debt on the employer. What has happened is that by legislative fiat companies are now liable to foot the full cost of the benefits and, frankly most of them simply can't afford to take that hit all in one go.

Tim is right. Up until now limited companies have only been liable for their own debts. No longer.

I doubt very much whether tPR (yes, note the jazzy new acronym - IMHO the whole shebang is just another public sector job creation scheme) has a cat in hell's chance of successful enforcement in Norway - its just tough talk.

Posted by: a pension consultant writes | Aug 19, 2005 5:23:12 PM

Of course, plenty of underfunded schemes went into wind up with financial engineering to walk away from the debt before April this year, when the new law came in, which wouldn't have done had the new law not been in the pipeline.

The pensioners of these schemes will get some drisory proportion of their entitlements. all perfectly legal and it wouldn't have happened if the Government had not introduced the new law.

Unintended consequences you see.

Posted by: a pension consultant writes | Aug 19, 2005 5:30:25 PM