But the deal is also a strong reminder of what can be achieved when trustees of DB schemes, whose sponsoring employer is struggling, engage with TPR, the Pension Protection Fund (PPF) and other key stakeholders, at an early stage.
This is a message I want to make loud and clear to trustees who, for example, may be concerned their sponsor is struggling or who are already involved in discussions about a restructuring plan, a company voluntary arrangement (CVA) or other form of restructuring/insolvency process.
At TPR, our job is not only to use our powers when things go wrong. While trustees are the first line of defence for savers, through an open dialogue with them, their advisers and company boards, we are skilled at supporting trustees where necessary to negotiate the right security and other protections for pension savers when companies are struggling or failing.
The latest data from the Insolvency Service shows that the number of registered company insolvencies in January 2023 was 1,671. This is 7% higher than in the same month in the previous year (1,567 in January 2022), and 11% higher than the number registered three years previously (pre-pandemic; 1,502 in January 2020).
So we know companies are struggling, and we are alert to the problems that may cause trustees.
Arcadia: how we added value
To highlight how our involvement adds value to often challenging negotiations, it’s worth recapping briefly on Arcadia’s pension schemes. Without the work of the trustees and our and the PPF’s involvement, it is likely members of the Arcadia pension schemes would have suffered a reduction in the benefits originally promised to them.
In autumn 2018, Arcadia Group Limited (AGL) realised that it would face liquidity issues in 2019 resulting from the widely reported challenges in the high street retail sector. AGL’s directors, along with the directors of six of its subsidiaries, decided to propose CVAs with creditors of those companies to reduce the rents on some of the group’s commercial properties. The trustees were also asked to accept a 50% reduction in annual Deficit Repair Contributions (DRCs) to the pension schemes.
Having concluded that a better outcome could not be attained for the schemes by other means, including the use of our powers, and after considering how a CVA would impact PPF funding, we together with the PPF agreed that the CVAs were the best option.
Crucially, we, working alongside the trustees and the PPF, took a key role to ensure that the schemes’ estimated outcomes on insolvency before the CVA proposal were protected by the terms agreed with AGL and/or the majority shareholder. The schemes were given security over group assets to a value that preserved their estimated insolvency outcome. Additionally, a cash injection from the majority shareholder (backed by security) to the schemes remained payable even if there was an insolvency of the employer in the future.
The eventual outcome was strong:
Security over group assets to the value of £185 million for the benefit of the schemes. This secured what the schemes were projected to receive from an insolvency of AGL if it had happened before the CVA proposals were made.
£100 million cash from the majority shareholder, payable in three instalments over the first two years, backed by a Letter of Credit arrangement from a well-recognised Bank, plus a further £25 million security (bringing the total value of assets secured for the schemes to £210 million). This represented mitigation for the reduction in the DRCs being paid by AGL for the first few years of the CVA.
The new level of DRCs (£25 million per annum in aggregate) would start to increase by pre-agreed amounts after three years.
Lessons for trustees
Cases such as Arcadia highlight a number of key factors that trustees should be considering where their sponsor is challenged.
The first is the importance of having a comprehensive financial information-sharing package that includes detailed forward-looking forecasts and how these may vary, which is assessed regularly (ideally quarterly) by appropriately qualified independent covenant advisers, with costs borne by the sponsoring employer.
The second is the need to involve us at an early stage when it becomes clear that trading for a sponsoring employer is challenged, when the viability of a company is uncertain or if there are issues or defaults with other key financial creditors.
Thirdly, it is important to ensure scheme trustees (as they did in the Arcadia case) have the right skills to deal with a distressed situation and have access to expert advisers.
The message is simple: the sooner we are involved, the more benefit we can bring to achieving robust settlements with other creditors, and ensure the best outcomes for savers is achieved.
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