If a company goes bust, which creditors get priority? If you have ever been a bankrupt company’s creditor, you will know you are a long way down the list. Normally the banks will swoop in, taking the first pickings and leaving the rest with little more than scraps. But a new court ruling may give pension trustees priority over banks. And that, say the critics, will be catastrophic. We would suggest we are simply seeing the inevitable unravelling of the most important economic issue of our age.
It all kicked off on Friday when the Pension Regulator won its case against the trustees of the two bankrupt companies, Lehman Brothers and the Canadian telecoms firm Nortel. Lehman Brothers carried a pension deficit of no less than £2.1bn, Nortel a deficit of £148m. No wonder the bankers from the two firms wanted to see their debts settled first.
Well, the court ruled that a contribution notice from the pension trustees must take priority.
Banks are up in arms. It means, or so they say, that in future banks will have to charge higher interest on their lending to companies, or maybe won’t be able to lend so much at all.
This is a tricky one.
If you are a creditor of a firm that goes bust, and see the banks cream off all the money that is left over, it can be galling to say the least. But in turn, banks argue that it is only because they get priority that they are able to lend as much as they do. So if banks have to suffer along with the rest of us, they will lend less.
On the other hand, don’t you think banks have too much power? Maybe if other creditors were afforded higher priority, they may be able to offer clients improved payment terms.
Alas, the court ruling does not help. It merely affords company pensions a higher priority still.
And of course, the objections are many. This one will run and run, so expect to hear a lot more about it over the next few weeks.
But doesn’t this boil down to the same old problem? As the baby boomers reach retirement, there will be growing pressures on pension arrangements everywhere.
Funding the retirement of the baby boomers will be the single biggest economic challenge in the developed world for the next few decades. And always there will be nigh on impossible choices. Always the need to pump money into pension schemes will be present. Corporate profits will fall, and so companies will invest less, and employ fewer people, and so it will be harder to save for our pensions.
Friday’s court ruling is just one of the opening moves in what will prove to be the most fraught economic pressure point for the next 20 years or longer.
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