Guest comment: Trustees act to prevent private equity supermarket sweep

Morrisons supermarket has been the subject of a bidding war, culminating in an announcement last month that Morrisons’ board had agreed a £7bn takeover by US private equity firm Clayton, Dubilier & Rice (CD&R).

The Morrisons pension schemes have over 85,500 members and whilst the two main schemes are said to be fully funded on an ongoing basis (meaning they can afford to pay benefits from the scheme's funds as they fall due), they were estimated to have a cumulative deficit of £800m on the more onerous buyout basis in May this year (this means they'd need an extra £800m if they were to buy all of the schemes' benefits out with an insurance company – a sum not to be sniffed at).

That buyout deficit figure means that whilst no deficit contributions are currently payable, the schemes ultimately rely on the covenant of Morrisons to make future contributions to bring the funding level up to that required to facilitate buyout of all benefits via insurance policies.

When we talk about the employer covenant there are two key elements, arguably of equal importance: (i) the ability; and (ii) the willingness of the employer, to fund the deficit. The Trustees of Morrisons' two main pension schemes (the Morrisons Retirement Saver Plan and the Safeway Pension Scheme) appear, understandably, to be concerned about both elements. They have raised concerns that current support could be weakened by a private equity buyer.

Chair of trustees for one of the schemes, Steve Southern, has said: “An offer for Morrisons structured along the lines of the current offers would, if successful, materially weaken the existing sponsor covenant supporting the pension schemes, unless appropriate additional support for the schemes is provided, … We hope agreement can be reached as soon as possible on an additional security package that provides protection for members’ benefits.”

It is often assumed that pension schemes have priority over other debtors upon the insolvency of its sponsoring employer(s). However this, sadly, is not the default position. If the trustees do not have security they will simply rank alongside the other unsecured creditors. Indeed, where other creditors have security they will take priority over the pension scheme.

In these scenarios it is easy to see how a pension scheme could have insufficient funds to buyout their liabilities in full, potentially resulting in reliance on the Pension Protection Fund and a reduction to some scheme benefits – not a prospect any trustee relishes! With this in mind one can understand the concerns voiced by the trustees of the Morrisons schemes relating to a potential takeover which secures additional debt on the retailer’s assets.

In response, Morrisons has said: “Morrisons is supportive of the parties reaching an agreement which protects and supports the pension schemes in an appropriate manner, and will continue to work with all parties to achieve this as soon as possible.”

Inevitably The Pensions Regulator is taking a keen interest, and a spokesman has said: “In our role to protect savers, we are working closely with the trustees of the Morrisons pension schemes and we note they are taking a robust position in terms of securing the best outcome for members in relation to the proposed transaction. … This is in line with our expectation that trustees act as the first line of defence for members.”

It is understood that the Morrisons schemes already benefit from security from freehold properties held within a pension funding partnership structure. This will give them a degree of comfort, and is more than many schemes have. However, it is reassuring that the trustees are not simply settling for what they already have and are assessing the level of security they require before they can get comfortable with the proposed takeover.

Private equity investors aren't famed for wanting to inject funds into pension schemes – so the buyout deficit is unlikely to be reduced or eliminated imminently post-takeover. We would expect the parties may be discussing the possibility of further security (perhaps in the form of money locked away in escrow, a charge over further properties or even intellectual property) or the more attractive option of one or more cash injections. Hopefully the trustee's robust position will ensure the 85,500 members' benefits, and those of their dependants, are safeguarded for the future.

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