Cadbury opts to de-risk pension scheme

Birmingham-based confectioner Cadbury has become the latest firm to de-risk its pension scheme, having signed a £500 million buy-in deal with Pension Insurance Corporation (PIC), protecting about a fifth of its £2.5 billion liabilities.

Speaking to Life & Pensions, David Collinson, a partner with PIC who advised on the deal, said it was centred on a tranche of about a third of the scheme’s 30,000 members and had not involved other de-risking options, such as enhanced transfer value (ETV) exercises or incentivising early retirement, prior to signing the buy-in.

He said this was because the scheme felt it was on a relatively secure footing in terms of its funding – the scheme’s coverage ratio of assets to liabilities is almost 90% – and was therefore “more able” than some of its peers to take a broader strategy in this area.

A representative for the scheme trustees said the Cadbury’s pension fund had “been moving away from growth assets to matching assets” for some time and the deal was considered the most appropriate for the scheme members, although he would not comment on what basis the deal was funded – whether it was collateralised, or used gilts or corporate bonds. According to the most recent available data in the firm’s 2008 annual report, the Cadbury pension fund had a £258 million deficit in 2008, despite a £78 million injection of capital into the scheme spread throughout 2007 and 2008, and a pledge to make a further contribution of £60 million in 2009 to fund past service deficits. In 2009, its strategic investment target of 44% equities, 6% property and 50% fixed income and debt instruments.

Negotiations between Cadbury and PIC began in 2008, prior to the extreme market dislocation of the financial crisis. Collinson said as markets and pricing had returned to normal, demand had risen.

“The timing wasn’t related to the credit crunch – a large number of schemes had considered de-risking exercises because the pricing available in the market was surprisingly attractive,” said Collinson.

 

“It’s the equal biggest deal of the year and the best known company to have undertaken a risk transfer. I expect we’ll see an upturn [in numbers of buy-in deals] partly because of the status of Cadbury, but also because of the attractive pricing available for these types of deals.”

The pension fund announcement comes soon after Cadbury launched a spirited defence against a £10.4 billion hostile takeover bid from US food giant Kraft, although the company is adamant the timing of the deal is coincidental, which the trustee representative said was a “decision based on their own timelines”, so of no relevance to the bid.

However, rather than strengthen Cadbury’s position to fight the take-over, pension experts have said a better funded pension scheme may make the firm more attractive to bidders.

Stuart Benson, a worldwide partner in the merger and acquisition group of consultancy Mercer, said de-risking and other activities to strengthen a pension’s funding position in light of an aggressive takeover could be “a poison pill” for the company involved.

“In general terms, large pension deficits are a big deterrent to any potential acquisition – companies tend to shy away from defined benefit schemes. But if a company was trying to fight off a [take-over], then solving the pension problem could encourage a bid. It would make it more attractive [to buyers].”

Marc Hommel, UK pensions leader with Pricewaterhouse-Coopers, said while a potential buyer “may view a de-risked pension fund more favourably than a volatile one” they would also have to pay close attention to the basis used to value a company pension scheme, and not merely accept figures provided by the firm.

“They have to use assumptions consistent with the basis they’d use to buy the overall sponsor. We’ve seen deals where the buyer has used the accounting or trustee cash funding valuations, which may not reflect the true position of the scheme.”

The proposed merger between British Airways (BA) and its Spanish counterpart Iberia could also be affected by severe pension difficulties.

A pension funding review has revealed the UK carrier to be stricken by a £3.7 billion deficit, but viewed on an ‘all gilts’ basis – using only UK government bonds to fund the scheme – the deficit would more than double to a record £8 billion.

BA has until June 30, 2010 to present a recovery plan to the UK’s Pensions Regulator, although the Regulator has said it feels preliminary data presented to it may be “materially below” the appropriate level required to close the gap.

BA and Iberia’s agreement would allow the Spanish airline to walk away from the deal unless BA is able to get the pension situation under control. The airline has also asked Roger Maynard, currently director of investments & alliances, to step down from his position as the chairman of trustees, with immediate effect, in order to “avoid concerns” over any potential conflict of interest in his role of the Iberia merger.