Tui UK pension scheme has agreed a deal to reduce its sponsor’s annual cash contribution by £38m in what has been called a “watershed moment”
The travel group announced last week it would bring in three measures to combat rising costs for its parent company, increase administrative efficiency at the scheme and safeguard its members’ pensions.
The three moves would lead to the scheme’s £411m deficit dropping by £63m and reduce the sponsor’s £90m annual contribution to £52m, the company said.
The three measures were:
Using two of the parent company’s highest profile brands – Thomson and First Choice – to provide collateral for its defined benefit members’ accrued rights.
Merging four of its six schemes into one, leaving three separate schemes to administer.
Capping pensionable pay increases to 2.5% a year for members with pensionable pay in excess of £30,000.
The use of brands as a form of collateral is the first use of intangible assets to secure pension liabilities by a UK scheme. Previously schemes such as Sainsbury’s have used property, and last year saw Diageo use reserves of whiskey.
Stuart Whitwell, joint managing director of Intangible Business, who helped value the brands and negotiated the deal with the trustees and parent company, said he expected more schemes to follow this move.
But he added it would only be the largest and most high profile brands which would be able to maximise the security for their members.
“Thomson and First Choice are hugely valuable brands and leaders in their industry,” he said. “This new arrangement is an effective way of using an unleveraged asset to manage a pension liability.
“Trustees benefit from a healthier sponsor company, guaranteed royalty payments and now have security over two valuable assets.”
He added: “This is a watershed moment for the pensions industry."
Contingent asset
The deal to use the two brands as collateral was formed as a pension funding partnership arrangement.
This saw the two brands valued at £275m on a distressed basis, as the schemes would only own them outright if their parent companies went into administration.
The brands were then placed in the partnership, with the pension scheme receiving a bond-like income of £16.5m royalty payments every year from the parent company for use of the brands. This would last for 15 years.
On year 15, the parent company would pay the pension scheme the lower of £275m or the aggregated funding position at that point in time. The sponsor would then take back ownership on the brands.
David House, group reward director at Tui UK, said negotiations between the parent company and the board had begun 18 months ago and it had been a challenge getting trustees comfortable with the idea of using intellectual property as an asset.
He said the process was made easier because the company used advisers who were very experienced in the area, including Intangible Business, BNP Paribas and Deloitte.
He added the trustees had been in close talks with the Pensions Regulator over the deal and had ensured it complied with the regulator’s guidance on using contingent assets. But the trustee board did not seek formal clearance from the regulator over the deal.
“What’s been really beneficial is throughout the entire process we worked very openly with all the parties that were involved and we’ve worked through things together,” House said.
“We held quite a lot of joint meetings – some of them have been unwieldy because of the sheer number of people involved.
He added: “We’ve been very meticulous in terms of capturing all the issues which were raised from whomever was raising them, documenting them and then in a very organised fashion, working through those issues and ticking every one of them off and getting to a resolution that everyone was comfortable with.
“A lot of this is about process and project management.”
Scheme merger
Due to a number of acquisitions by the parent company, Tui UK was running six separate schemes, each with their own trustee board.
As part of the cost-reducing exercise, Tui has merged the four smallest of these schemes, leaving just three to administer.
This had followed the implementation of a common investment fund across all the schemes 18 months ago.
House said the company had decided not to merge all six schemes as the two which were not merged had significantly different benefits packages and management structures than the four merged schemes.
“The additional administrative costs of maintaining three schemes rather than one is offset by these operating issues which we feel wouldn’t have wanted operating across the entire population,” he said.
“Quite a lot of the benefit one might have achieved by a complete merger, we’re achieving anyway through the common investment fund.”
