British banknote printer De La Rue has cut deficit repair payments to its defined benefit pension scheme, contingent on the success of its bid to raise an extra £100m in capital.
De La Rue, which also prints passports and other security printed products, had already been struggling financially before the coronavirus crisis, and has since seen its hopes for recovery suffer the additional hit of the lockdown.
In an attempt to improve its financial standing, in June the company announced a £100m capital-raising venture – issuing almost 91m new ordinary shares at 110p each – in a move underwritten by Investec, Numis Securities and Barclays Bank.
The value of the group’s defined benefit scheme moved to a net accounting surplus of £64.8m, from a £76.8m deficit in March 2019, attributed in the company’s annual report to increased investment returns, a reduction in liabilities, and an increase in the value of the scheme’s assets. However, an actuarial valuation of the scheme in December 2019 revealed a funding shortfall of £142.6m.
It was predicted at the time that the deficit would increase to £190m by April 2020. Now, in a bid to cut costs and manage cash flow concerns, a revised schedule of deficit repair contributions has been agreed with the scheme’s board of trustees that amounts to a significant reduction over the next three years.
Trustees need to make sure they’re not the only ones taking a hit: what other actions are the company taking to try and manage whatever issues it’s facing? It can’t just be the trustees compromising to help it get through its difficulties
Faith Dickson, Sackers
Under De La Rue’s old recovery plan set out in 2015, the payments would have been £22.2m between April 1 2020 and March 31 2021, £23.1m between 2021 and 2022, and £23m a year thereafter. But now the company’s DRCs for each of these three years have been reduced to £15m, to be compensated for by increased repayments later.
The new agreement also sees the scheme relinquish its claim on the £100m raising. The trustee “has contractually agreed not to request any portion of the capital-raising proceeds”, the announcement states, but adds: “This agreement with the trustee is conditional on an amount in full settlement of the capital raising in the gross amount of at least £100m having been received by the company by no later than July 31 2020.”
Should that amount not be raised by the specified date, it would revert to the previously agreed repayment schedule. However, the company warns “it is unlikely that the group would be able to make any further payments to the UK pension scheme if (…) an alternative financing plan were not agreed between the company and the lenders by the plan deadline”.
It adds that “if an alternative financing plan were not agreed by the plan deadline, this would constitute an immediate event of default”, and that “under these circumstances, the group is not expected to have sufficient cash resources to repay the amounts drawn and/or to continue trading, and the group could be forced into insolvent liquidation”.
De La Rue chair Kevin Loosemore, acknowledged the wide array of problems faced by the company the in the company’s annual report, not least that the business “has experienced unprecedented management change, with the chairman, chief executive, chief financial officer, senior independent director and most of the executive team leaving, or resigning, in the past year”.
He details steps being taken to return De La Rue to profitability, including the issuance of new shares and negotiations with its various lenders.
“We have a target of returning the company to a strong, financial position and an operating platform that will deliver sustainable growth at high operating margins and strong cash generation in the medium term,” he says.
“Following an initial period of cash outflow to fund the turnaround plan, we aim for the group to be generating positive free cash flow and capable of supporting sustainable cash dividends to shareholders.”
Trustees must ‘understand the business case’
With cash flow problems mounting at many companies as the coronavirus crisis rumbles on, trustees may be faced with little option but to accept reduced contributions from their employers.
Research published in May by pensions advisory firm Isio found that as many as one in five sponsors may end up suspending deficit contributions. The company surveyed 400 of its clients and found that 12 per cent of those polled had already requested suspensions, with a further 7 per cent actively considering such a request.
In these cases, it is vital that trustees understand the business case for such suspensions, according to John Sheppard, pensions partner at law firm Linklaters.
“Certainly there’s been an increase in companies looking to restructure their DRCs as a way to manage the cash flow crisis caused by Covid-19, [which] has created cash flow restraints and companies looking to preserve capital or raise additional capital to manage themselves through the crisis, which is why we’ve seen more of these requests come about,” he says.
“Trustees need to understand the business case: the reasons why the company is asking for it, and the reasons why the trustees agreeing to it will put the company in a stronger position while being able to meet its contributions further down the line.”
“What they don’t want to do is to agree now that they’ll get a lower amount, then a higher amount in two years, only for the company not to be around in two years to pay that higher amount,” Mr Sheppard notes.
Schemes must be treated fairly
The guidance set out by the Pensions Regulator specifies that pension schemes cannot be seen as an easy option to improve cash flow, and much less the only option, says Faith Dickson, partner at Sackers. Both she and Mr Sheppard stress that schemes must be treated fairly in relation to other lenders, though fairly does not necessarily mean “the same as”.
“The regulator talks about equitable treatment,” Ms Dickson says.
“They’ll be looking at things like other suppliers you might delay payments to, and definitely whether you’ve stopped paying dividends to shareholders. You can’t be seen to be paying dividends while you’re suspending contributions.”
DB employers mandated to justify further payment holidays
Trustees of defined benefit pension schemes will have to report decisions to allow sponsors to skip or delay deficit payments to the Pensions Regulator from July, as the watchdog drew fire for not insisting on this transparency from the start of its Covid-19 easements.
She adds that most suspensions have an automatic trigger linking dividends and DRCs, such that when one recommences the other does too. However, new guidance from the regulator requires suspended dividend payments “not to start again until the deferred or suspended contributions have been paid”.
From a trustee’s perspective, fairness is “the key aspect”, Mr Sheppard says.
“They need to make sure they’re not the only ones taking a hit. What other actions is the company taking to try and manage whatever issues it’s facing? It can’t just be the trustees compromising to help it get through its difficulties.”
As to how this will be judged, Ms Dickson notes that the regulator will look to such things as dividend suspensions, and “whether the company has banks lending to it, and are they giving the company any slack in terms of repayments?”
“The regulator is encouraging trustees to look at other stakeholders and how they’re being treated,” she says. “The pension scheme shouldn’t be seen as the easy option for easing cash flow, it should be part of a package.”
