LONDON -- The trustees of the British pension fund of bankrupt U.S. auto parts maker Federal-Mogul, with 37,000 members, said they have been forced to vote against a rescue plan for the scheme as they consider new proposals from the United States.
The proposed plan by Federal-Mogul Corp. for the fund of United Kingdom subsidiary Turner & Newall, had not been adjusted to include a new offer led by U.S. financier Carl Icahn, the largest holder of the company's debt, in October, they said.
Therefore, the trustees have been forced to reject the original proposal at a voting deadline Wednesday, because it did not address their concerns, endorsed by an English High Court ruling, that by "letting the plan run," as the U.S. company asked, they would treat different classes of pensioners unfairly.
"The plan of reorganization has not yet been amended to reflect the new proposal. The position therefore is that, as at the voting deadline, the only plan on which the trustees can vote is the current plan, which the court has directed the trustees not to accept," they said in a statement late Tuesday.
Under the U.S. reorganization plan, both Turner & Newall and Federal-Mogul could emerge from United Kingdom administration and U.S. Chapter 11 bankruptcy protection, which they entered in 2001 to be shielded from huge asbestos liability claims, largely derived from the takeover of Turner & Newall in 1988.
From 1920 to 1976, Turner & Newall was the largest employer in the British asbestos industry and Federal-Mogul has been hit by $11 billion in claims stemming mainly from its United Kingdom operations.
The fund has an estimated shortfall of $1.58 billion and if the trustees said "let it run" that would have given Turner & Newall a substantial release from its obligations under pension law to make regular contributions to make good the scheme deficit. It could have also meant members contributing to the scheme for payments to existing pensioners would have no guarantee of future payments from the fund at their retirement.
But the trustees said they wished to continue discussions with Federal-Mogul and creditor groups over the latest offer. The new plan proposes creditors, including Icahn, would put $25 million into the Turner & Newall pension scheme each year for the first three years after the company emerges from administration, and then fully close the scheme's shortfall within 10 years.
"The trustees believe that, in view of the effort being made on both sides to reach a satisfactory conclusion and the discussion with the company, the passing of the deadline will not prevent a solution to the issues confronting the pension scheme if agreement can be reached on the outstanding points of concern," the statement said.
A source close to the negotiations said the trustees are concerned that there is no commitment under the new offer to make the future funding of the pension scheme binding under U.S. law.
Leading United Kingdom independent pension consultant John Ralfe said in a research note produced for RBC capital markets on Wednesday, that the trustees face the task of negotiating the "least worst alternative" with Federal-Mogul and its creditors.
With a deficit of $1.62 billion, 20,400 pensioners would lose 20 percent of their pension promise and the 16,800 nonpensioners would lose around 80 percent of their pensions promise on a windup of Turner & Newall, he said.
The new plan involved recovering only 7.2 percent of the deficit or $117 million for the pension fund, and alternatively a controlled sale of the United Kingdom assets could raise between $154 million and $230 million more than this, but either would leave a massive pension deficit, he added.
"No one should think the new proposal solves T&N's pension problems. The proposal is to make only the legal minimum contribution to the scheme over the next 10 years. It is not even enough to stop the deficit widening each year."
Ralfe said Britain's new Pension Protection Fund, which the government said would be retrospective, could be faced with covering a Turner & Newall pension deficit of $929 million under fund rules immediately if it opens its doors in 2005.