Textile rental provider Johnson Service Group has committed to paying £1.5m to its defined benefit scheme following the £8.25m sale of its dry cleaning business to Timpson Group.
Experts have highlighted the potential for increased mergers and acquisitions activity where overseas companies take advantage of the weak pound to snap up UK companies at a discount. Corporate transactions can create opportunities for schemes to secure extra money or guarantees from the sponsoring employer.
Where there is a sale, from the company’s perspective it’s a good time to pay down the deficit
Lynda Whitney, Aon Hewitt
Earlier this week the group announced the sale on a debt free, cash free basis, “subject to adjustments for normalised working capital”.
It has committed to paying an additional contribution of £1.5m to the pension scheme. The rest will be used to reduce the net debt of the company.
In addition to the one-off contribution, the sponsor made an annual payment of £1.9m to the scheme as part of the recovery plan agreed with the trustees. It has been paying £1.9m a year since 2013, with the exception of 2014, when it paid £2m.
The group recorded a deficit of £11.1m in June last year, down from £13m six months earlier, which was attributed to “higher than expected return on scheme assets offset by the net impact of lower corporate bond yields and lower inflation on the valuation of scheme liabilities”.
The scheme also has a contingent asset in place to increase its funding security.
In the group’s most recent interim statements, dated June 2016, it said it has granted its bankers and trustee of the pension scheme security over the assets of the group.
The first priority of security is for £28m to the trustee, ranking at the same level as bank facilities of up to £156m. Ranking second is security for the balance of any remaining liabilities to the trustee, as well as any remaining bank liabilities.
Window of opportunity
Lynda Whitney, partner at consultancy Aon Hewitt, said mergers and acquisitions provided a good opportunity for both companies and trustees to consider additional contributions to the pension scheme.
“Where there is a sale, from the company’s perspective it’s a good time to pay down the deficit,” she said, adding that it also often made sense for the trustees to pursue a contribution.
“If the company is now, say, half the size, is it still able to support the scheme? [The trustees] might decide the deficit should be commensurately lower.”
Increased M&A activity
With the pound at a lower level than in previous years, acquisitions of UK companies might look ever more attractive to overseas investors, increasing the volume of transactions.
“In general, there’s a little more M&A activity,” Whitney said, as this is a good time for “overseas companies [to] look at the UK.”
Richard Smith, partner at consultancy Spence & Partners, echoed that a sale would likely lead to increased trustee engagement.
Alstom energised by employer guarantee and extra contributions
The Alstom Pension Scheme has agreed an increase in recovery plan contributions following a drop in its funding level, but the decision has been buoyed by a strengthened sponsor guarantee.
“When a business sale takes place that’s a trigger point for entering into this sort of consideration,” he said. “It’s a clear potential change of covenant. It’s a trigger for looking at what the pension implications are.”
Considering the current weakness of the pound, Smith said: “You’d expect it would be easier for companies to sell to overseas companies. With that increased activity you would expect to see more pension activity.”
However, he added that the pension scheme’s funding level alone was unlikely to be a driver of business strategy.
Smith also questioned whether a straightforward contribution was necessarily the best use of the money generated from the sale of a company.
“The question I would ask is whether that’s the most effective use for the money,” he said. “Often companies can get more return by investing in a liability-management exercise.”
