How growing pensions deficits threaten UK plc: Companies in the firing line over savings shortfall
At first blush there may appear to be little in common between Tata Steel in Britain, Mr Kipling owner Premier Foods and the department store chain BHS. But as old, established UK-based enterprises they have all at times operated ‘gold standard’ final salary pension schemes. When the companies change or seek to change ownership, there is an obligation for the existing owners and the buyers to take into account the company’s covenant – their obligations – to the pension scheme. One of the features of these older companies is that often the numbers of existing pensioners and the company’s obligations to them exceed that of the existing workforce.
In many cases current staff will have been weaned off defined benefit, or final salary, plans to defined contributions where the risk lies more directly with the workforce. But it has not been enough to stop a huge black hole opening up in nearly 6,000 defined benefit pension schemes across the country, meaning there is not enough money in the pot to meet future obligations.
Recent numbers show that in February this year there was a shortfall of 80 per cent – or a thumping £322.8billion. This would be the potential liability of the Pension Protection Fund (PPF), set up to protect pensioners if their pension fund becomes insolvent, if all the defined benefit plans were to go belly up at the same time. Among those companies with large deficits is Tata Steel, mainly formed from the old British Steel, once one of Britain’s largest employers. At BHS, negotiations about the pension deficit are ongoing with the former owner, Sir Philip Green of Arcadia. Any new owner of Premier Foods, the subject of an American bid, will need to take on the pensions covenant to past and current staff.
British Steel – Deficit: £966m – Members: 134,000
The £13.9billion British Steel pension fund is one of the biggest in the UK. It has 134,000 members but just 16,075 current staff contribute to the fund. A full valuation is carried out every three years and the last full update, back in March 2014, shows a relatively modest deficit of £90million. However, this assumes regular contributions from Tata Steel, which took on what was left of British Steel when it bought Corus for £6.7billion in 2007 but has put its UK operations up for sale. The pension trustees said Tata was expected to contribute £35million this year, £60million in 2017 and £65million in 2018. However, if Tata sells the business or shuts it down these payment are at risk.
In an update issued this month the trustees estimate that without these contributions the deficit stands at a much higher figure – £966million. But it is feared that the actual amount could be even more still as record low gilt yields hit returns on investments. This has left the Government and any potential buyer with plenty to worry about. Allan Johnston, chairman of the pension trustees said in the update ‘if the scheme was wound up Tata Steel would be required to pay contributions’ to cover the shortfall. In the event that this did not happen the PPF would be required to pay limited compensation to members.
BHS – Deficit: £571million – Members: 20,000
Retailer BHS is struggling amid weak sales, rising costs and heightened competition on the High Street. It was sold for £1 last year by billionaire former owner Sir Philip Green to a group of little-known private investors led by Dominic Chappell, a twice-discharged bankrupt former racing driver. The group is now battling for survival and a major issue is the large hole in its pension fund.
The pension scheme, which closed 11 years ago, is expected to end up in the hands of the PPF, the state-backed ‘lifeboat’. Some 13,000 people in the scheme have not yet retired and could lose at least 10 per cent of their retirement income if the PPF takes over. Thousands more who are already retired will see annual pension rises capped at 2.5 per cent – meaning they would lose out if inflation rises above that figure. About £300million is estimated to be needed to prop up the scheme, but the total shortfall is £571million.
Although Green no longer owns the company, the pension regulator has the power to force a former owner of a business to make payments to a pension fund if it can be proved there has been an attempt to avoid or not support statutory liabilities. The regulator is in talks with the PPF, the pension trustees and Green.
Premier Foods – Deficit: £390million – Members: 50,000
Mr Kipling cake maker Premier Foods is in takeover talks with US food giant McCormick. The latest offer for Premier – there have now been three from McCormick – values the company at £1.5billion in total. But the Americans want to pore over the detail of Premier’s debt and pension scheme and have urged its would-be prey to ‘engage fully’ and open its books. What it really wants to know are the details of the Premier pension scheme.
Premier is an amalgamation of a series of takeovers and mergers, leaving it with seven pension schemes and more than 50,000 members who are past and present employees. The schemes include the Chivers 1987 pension scheme and the RHM pension scheme, which comes from its ownership of the Hovis bread group. Three years ago, when Premier was desperately restructuring and performed a rights issue, the deficit was as much as £800million.
Source: Daily Mail April 2016
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