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Uniq sheds its pension scheme to save its bacon

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It was announced on 9 February that, after an 18-month debate, sandwich maker Uniq had finally reached agreement with the Pensions Regulator and the Pension Protection Fund (PPF) on the future of its pension scheme.

 

The deal will see the scheme (which has a buy-out deficit in excess of £400 million) transferred to a new employer, which will be placed into administration, sending the scheme into a PPF assessment period. As part of the deal, the scheme will take with it £14 million and a 90% shareholding in the company. However, with Uniq’s market value being around £6 million at the time of the announcement, one has to be extremely optimistic about the turnaround of the business to imagine a situation where the benefits of scheme members are not cut.

The Uniq pension saga started back in 2009 when the weak covenant support provided by the company led the trustees to adopt a conservative valuation basis, which gave rise to a deficit over £400 million and posed a significant funding problem. The initial proposal by the company in 2010, which was expected to eliminate the deficit over some 50 years, has unsurprisingly been rejected by the regulator. Given that the scheme has several millions of assets and liabilities and the size of the company is only a small fraction of that, the regulator must have been determined to make sure that in the process of searching for a solution it was not the tail that was wagging the dog.

Is the new proposal a good deal? Not really, but perhaps the only one that was acceptable to all stakeholders. De-risking – the magic word in pension circles these days – was most likely the key driver behind the agreed solution for Uniq, although applied from slightly different perspectives in this case. The regulator and the PPF wanted to get certainty by crystallising the pension obligations and removing the covenant risk exposure represented by the sponsoring employer. Creditors and shareholders wanted to see the pension risk being removed from the company so that they could fund a business which was free of any pension obligations.

With the company not being able to fund the large deficit over a reasonable period and insolvency looming if that was required, the scheme looked destined for the PPF. The longer the scheme took to enter a safety fund, the bigger the problem would be for the PPF. The scheme would have continued to pay out members’ benefits at their full level, depleting the assets, with more members additionally crossing the threshold for higher levels of PPF compensation. Therefore the value of certainty now for the PPF seemed to outweigh the small probability that the company could eventually solve its pension problems of its own accord. 

If the shares were to increase in value significantly such that the scheme was greater than PPF funded, the trustees would be able to secure higher benefits for the members than those that would be paid out by the PPF. This increase, however, has to happen while the scheme is in the PPF assessment period for it to benefit the scheme members directly. Finally, while the agreed solution will sadly lead to benefit cuts for members, it allows the company to avoid insolvency and continue operating its businesses, reducing the risk of job losses for current employees.

Lorant Porkolab (pictured) is senior consultant, head of covenant advisory services, at professional services company Punter Southall