On the go: The pension schemes of multinational transport company FirstGroup stand to benefit from the £3.3bn sale of its First Student and First Transit assets to private equity company EQT Infrastructure.
Some £2.1bn of the proceeds is to go towards addressing “long-standing liabilities”, while roughly £1.3bn is to go towards reducing indebtedness and derisking liabilities, such as the group’s legacy pension funds in North America.
The UK Bus and Group pension schemes will receive £336m, “enabling [a] move to a low-dependency funding position”.
The FirstGroup board has entered into a memorandum of understanding with the trustee of the First UK Bus Pension Scheme and the FirstGroup Pension Scheme, and part of which £220m of the £336m has been allocated to the former.
The First UK Bus Pension Scheme had an accounting deficit of £171m as of September 2020. It is hoped the total contribution will “accelerate derisking of these schemes”, according to a company statement.
A substantial amount of money will be held in escrow, which typically means by a third party that holds money on behalf of the two concerns that are party to the transaction.
In FirstGroup’s case, a further £95m of the money allocated to the First UK Bus Pension Scheme will be held in escrow, while £21m will be held in escrow by the FirstGroup Pension Scheme.
“Both amounts in escrow may be released back to the group following the conclusion of subsequent triennial valuations and subject to scheme performance,” the company stated.
“The transaction has no impact on the Railway Pension Scheme or the Local Government Pension Scheme in First Bus.”
David Martin, FirstGroup chairman, said: “This transaction, which follows a strategic review by the board of all options to unlock value, enables FirstGroup to address its long-standing liabilities, make a substantial contribution to its UK Bus and Group pension schemes, and return value to shareholders, while ensuring the ongoing business has the appropriate financial strength and flexibility to deliver on its goals.”
Pensions Expert has reported previouslyon an estimate from LCP that 75 per cent of defined benefit schemes could be looking to alternative deficit recovery means, with a surge of interest in contingent assets, as well as escrow-type approaches, which usually involve a third party holding money in trust.
Helen Abbott, principal at LCP, said: "I predict that, within the next two years, 75 per cent of companies with significant DB pension schemes will use contingent funding as an integral part of their governance processes to manage their legal, liability and reputational risks from the Pension Schemes Act 2021 regulator powers.”
Other factors leading sponsors and schemes to look for alternative solutions include Covid-19 and its economic implications, changes to insolvency laws which push pension schemes further down the priority list, and increased regulatory focus on dividends and other forms of “covenant leakage”.
Phil Cuddeford, partner at LCP, said: “We are seeing a surge in interest in contingent funding arrangements, ranging from cost-efficient vanilla approaches to highly bespoke ones. This is being brought on by big changes in the economic and regulatory environment.
“Contingent funding can be a win-win, giving members the security they need while not depriving businesses of the money they need to rebuild post-Covid and to invest for the long term.”
