Premier Foods sets up tasty scheme merger

The merger has been designed so that while the three cohorts will be in distinct sections of the new scheme, the anticipated buyout of the well-funded RHM section will release surplus to both the company and the members of the other two sections, which face a drastic shortfall.

With 34,500 members, the £4.3bn RHM scheme had a surplus of £837m relative to the funding standard prescribed in accounting standards – although this is usually some way short of the cost of buying out benefits with an insurer.

The 12,000-member Premier Foods pension scheme and 1,300-member Premier Grocery Products scheme had £707.1m in assets and a deficit of £464.7m – making them just 60 per cent funded.

In a statement, the company explains that the net present value of its deficit repair contributions could reduce to £175m-£185m from the current £300m-£320m as a result of the merger.

The company believes there will be a significant reduction in the future deficit repair contributions, from the current £38m a year down to a range of between £30m and £17m in 2023-24. Administration cost savings to the company will also amount to a hefty £4m a year from 2020-21.

The three sections of the new scheme will be segregated, all run separately until the RHM scheme buyout in three to five years’ time.

Trustees sign off in hope of strengthening sponsor

Michael Chatterton, managing director at Law Debenture and chair of the Premier Foods scheme, says trustees will then “de-segregate the remaining assets and liabilities”. He adds: “We think there will be surplus in a few years’ time and this will allow the Premier Foods and Products members access to that surplus, which will improve the funding of both schemes and the company will save some money in the long run.”

Duncan Leggett, chief financial officer at Premier Foods, says: “It is a great deal for the pension schemes and for the company. Clearly, there is a lot of potential benefit and we think it is transformational for the company and, more importantly, the Premier Foods pensioners should feel more secure with this agreement.”

But would the security of the RHM pensioners be devalued? Mr Chatterton thinks not: “The thing that might stop RHM getting to buyout is the failure of the sponsor, if Premier Foods ceased to exist.”

He adds: “The level of deficit repair contributions to the two schemes might pose a bit of a threat to the Premier Foods business. For a business that makes a trading profit of £120m to £130m a year, they have been paying in excess of £40m to the pension funds.”

Surplus makes cross-subsidy easier

According to Hymans Robertson analysis, 52 per cent of FTSE 350 companies have more than one pension scheme.

Alistair Russell-Smith, head of corporate defined benefit at Hymans, notes that their relative rarity often stems from just these concerns about cross-subsidy between member cohorts: “For example, if one scheme is far better funded than the other, it is difficult for the trustees of the better-funded scheme to accept a dilution in funding level that might come with a scheme merger.”

Sackers partner Eleanor Daplyn agrees that the scheme-specific funding regime limits the amount of scheme mergers that can go ahead.

She says: “They do still happen, particularly on a segregated or ringfenced basis, which is what Premier Foods have announced. Under this approach the schemes are combined under one trust ‘umbrella’, with one trustee board and scope for significant administrative savings.

“However, they remain separate for funding and related purposes, which means separate actuarial valuations, and that those that are less well-funded can’t benefit directly from another of the schemes doing better.”  

Jane Kola, partner at Arc Pensions Law, points out that in the Premier Foods case, it is the existence of a surplus in one scheme that makes such a move feasible.

“There will be many who will wonder how the trustees of an overfunded scheme can be acting in their members’ best interests by giving up the surplus and the potential of benefit improvements,” she says. 

”But members do not own surplus, and trustees should not try to ‘bank it’ for improvements unless they have very unusual rules that allow them to fund for surplus. Instead, the correct analysis is to remember that the best interests of the members are well served by securing their actual legal entitlements as promised by the sponsor.” 

Merger tips for trustees and sponsors

In order to successfully manage a merger operation, Mr Russell-Smith’s advices is to “plan carefully, agree the outcomes that you wish to achieve, and engage all stakeholders at an early stage”.

Ms Kola tells employers to “review the rules of all of their DB schemes to ensure that they have a say in the use of surplus, even if a full buyout looks a long way away”.

She says sponsors will find it difficult to justify a rule amendment giving them access to plan surplus once this has already risen, as the move will be seen as detracting from member benefits.

“While the scheme has a deficit, it is perfectly proper to alter the rules on the use of surplus to put the sponsor in the driving seat, as long as it is as a part of a package of measures that are in the interests of members overall, such as a part of a deficit repair deal in a valuation,” Ms Kola says.

She adds: “For trustees, it’s important to be open-minded about new ideas and work with your sponsor, recognising its interests. The members’ best interests are rooted in that collaborative relationship between trustees and sponsor.”  

Richard Butcher, managing director at PTL, tells ceding trustees: “Know your powers and leverage. Use them both.” 

To employers, he warns: “Don’t jump to merger. There are intermediate steps that can get you many of the advantages without the pain, including, for example, merging trustee boards, merging governance cycles, common service providers, etc.”

Ms Daplyn concludes: “There is a buzz at the moment around consolidation for both cost and governance reasons, and clearly corporates with large pension liabilities will aim to get the best ‘bang’ for their merger buck, so we may well see some more creative thinking.”