First Group's DB scheme under scrutiny following Apollo takeover bid

First Group’s defined benefit pension scheme has come under scrutiny following a takeover bid for the transport firm by the USA’s Apollo Management.

First Group, which runs bus services around the UK, as well as operating several train services around the country, revealed on Wednesday, 11 April, that Apollo Management had made a bid. However, it believes the proposal “fundamentally undervalues the company” and is “opportunistic in nature”. As a result, the board has unanimously rejected the proposal.

Scrutiny on company pension schemes is increasingly impacting possible acquisition activity in the UK. Recently, Melrose’s plans to takeover GKN were impacted by their ability to fund pension liabilities, which led to promises of £1bn for GKN’s pension schemes.

Now First Group's pension scheme is drawing attention; last year it was identified as the company most under pressure from its pension schemes relative to its size because of its £4bn pension liabilities against its £1.2bn market capitalisation.

Its half yearly results, published November 2017, revealed a UK DB pension deficit of £742.7m which includes its rail and companies. It has assets of £4504.6 and liabilities of £5247.3.

Commenting, Labour Shadow Pensions Minister Jack Dromey said: “It is vital in any takeover process that pensions are protected. No worker should suffer due to their employer selling off the business. We saw recently in Melrose’s hostile takeover of GKN that the process of voluntary clearance to The Pensions Regulator is not sufficiently robust and doesn’t ensure workers’ pensions are protected.

“The government must seek cast-iron assurances from any prospective buyer that there will be no detriment to workers’ pension schemes. If such guarantees cannot be provided, Labour will be calling on the government to block the deal.”

Old Mutual Wealth pensions expert Ian Browne said that high profile pension scheme debacles have led to a public outcry for definitive action to stop pensions being hung out to dry by unscrupulous employers.

“It seems The Pensions Regulator and government have heeded this call and are asserting their authority to ensure that pension schemes remain a priority to all businesses. This focus has already started to impact business moves with the fate of acquisitions increasingly tied to how they intend to handle the pension scheme liabilities. It is crucial such a crackdown continues as the fate of thousands of people’s prosperity in retirement rests on such actions,” he noted.

In the government’s DB white paper, published last month, it was revealed that the government has dropped plans to give TPR mandatory clearance powers for company transactions that concern a pension scheme, and instead, will work to build on the existing voluntary system.

The Department for Work and Pensions stated that it will work with TPR to “strengthen the existing notifiable events framework and voluntary clearance regime” to ensure that employers appropriately consider pension responsibilities during relevant corporate transactions. In order to assist this, TPR’s anti-avoidance powers will be extended to include greater information-gathering powers and punitive fines.

A spokesperson for The Pensions Regulator said: “Generally speaking, we expect any business planning a major corporate transaction, such as a takeover, to identify if there is potential material detriment to a pension scheme and explain how they will mitigate against that detriment.”

In addition, Lincoln Pensions CEO Darren Redmayne said: “As with Melrose and GKN this is another example of an iconic British company subject to a takeover bid where pensions are at the absolute heart of whether the deal happens or not. It is vitally important that shareholders are not the only beneficiaries in these situations; equitability of treatment is key. Shareholders getting a premium often involves a pension scheme being exposed to greater risk, particularly if it turns out to be a leveraged bid weakening the pension scheme covenant.”

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