Northern Rock 'must be uncompetitive'

[jemima]

Read the bit about Pensions at the end...


From Scotland on Sunday
http://scotlandonsunday.scotsman.com/bu ... 3882669.jp

Northern Rock 'must be uncompetitive or it will break European law'

By TERRY MURDEN
NORTHERN Rock will be forced to become uncompetitive or fall foul of European state aid rules, according to a leading business lawyer.

Anthony Woolich, competition partner at City law firm LG, said the Government faces a 'catch 22' over Northern Rock's restructuring because the requirements of European competition law appear to conflict with recovering taxpayers' money.

The Treasury is due to receive a plan from the nationalised bank's chairman, Ron Sandler, to restructure the firm ahead of a deadline from the European Commission which needs to be convinced there is no ongoing state aid.

"If the Government wants to remove Northern Rock from concerns about state aid it needs to make it uncompetitive, because unfair advantage is an inherent part of state aid," said Woolich. "In effect Sandler would need to weaken Northern Rock – which is offering some of the best deals to savers."

This may undermine hopes of repaying almost all its loan to the Bank of England by early next year. According to Simon Ward, economist at fund manager New Star, £13bn of mortgages could be repaid this year and £10bn of retail deposits could be attracted, which "would leave Rock only £2bn short of the estimated £25bn Bank of England loan".

But Sandler is putting the final touches to his business plan, which involves scaling back mortgage lending and luring new retail savings. He will attempt to rebuild its deposit base with competitive savings rates. Any payback will depend on such rates and on improving financial markets. The threat to the bank's 6,000 jobs, increasing scrutiny of the Government's finances, a slowing housing market and competition from rivals makes Sandler's model a sensitive issue. Details of the strategy are expected this week, after the Treasury submits the plan to the European Commission.

There may, however, be a second issue, surrounding the Northern Rock pension scheme, which is in deficit. "Under normal circumstances, where a company fails or goes into administration, the deficit can't be made up and members may just get the reduced benefits which the Pensions Protection Fund provides," said Adam Bushby, pensions partner at LG. "Here, however, the trustees can play hard ball and press the Government to make good the deficit.

"If the Government doesn't agree a funding plan with the trustees we could have the spectacle of the trustees asking the Pensions Regulator to determine how much the Government should pay to the scheme."