Sainsbury’s tackles bills with DB scheme merger

The decision will see £1.2bn of assets in the Home Retail Group Pension Scheme transferred into a new section of the £8.6bn Sainsbury’s Pension Scheme.

Scheme mergers are normally a result of corporate activity, both disposals and acquisitions.

In the year to April 2016, Stagecoach merged the East London and Selkent Pension Scheme into its main arrangement. Similarly, two sections within the Hewlett Packard scheme were combined in 2016.

It’s not an easy thing to do, but if you can achieve it, once you’ve got over the initial efforts and costs there are definitely benefits

Ian McQuade, Muse Advisory

Sainsbury’s took over the HRGPS when it bought sponsor HRG – including Argos and Habitat – in September 2016, adding about £315m to its net pension liabilities.

The decision to merge the newly acquired fund into the £8.6bn SPS as a separate section was taken “to reduce duplication of running costs”, a spokesperson said.

“We are moving to one segregated scheme in which the assets and liabilities of the Sainsbury’s and Home Retail Group… schemes will remain separated, but the merged scheme will be run by one new trustee board instead of two,” the spokesperson explained.

Initially there will be 11 trustees from the two current boards. “Eventually, the board will reduce to nine trustee directors, with a mix of member-nominated directors, independent and employed company directors,” said the spokesperson.

Previously, the Sainsbury’s scheme alone had 11 trustees, including five member-nominated trustees, five employer-nominated trustees and an independent chair, while the HRG trustee board was composed of two MNTs, four ENTs and an independent chair.

Different valuation dates can be an issue in scheme mergers; the next actuarial valuations are due as at March 10 this year for Sainsbury’s and March 31 for the HRG scheme, but this will be harmonised.

“We will be changing the year end to 30 September as this is a better fit for the company and trustee discussions, but we have committed to the first valuation of the merged scheme being completed by the time that the valuation of the two schemes would have been completed – ie by mid-June 2019 at the latest,” said the spokesperson.

Mergers bring savings

Reducing direct costs is the main driver behind scheme mergers, said Clive Gilchrist, deputy chair of professional trustee company Bestrustees.

“That’s in the interest of the trustees and the scheme as well. Arguably the money could go to contributions, though it never does,” he said.

Sainsbury’s has told members that “the money saved will stay in the scheme and be used to fund pensions rather than pay adviser costs”.

Gilchrist noted that creating a single and smaller trustee board can lead to indirect savings as well.

“At the moment, the company has to find trustees for [both schemes], which involves management time,” he said.

“If you only have one board you only have half as many meetings for your executives or member-nominated trustees to go to”, taking up fewer paid hours, he added.

Fewer stakeholders taking up less time has other advantages, said Ian McQuade, director at governance specialists Muse Advisory.

“From a governance point of view there is a simplification both for trustees and sponsor,” he said, and “for the sponsor it can help with strategic alignment”.

He added: “It’s not an easy thing to do, but if you can achieve it, once you’ve got over the initial efforts and costs, there are definitely benefits.”

There can be obstacles to a merger, however. Some schemes choose to merge their trustee boards but keep the schemes separate – as in the case of Lloyds Banking Group. This can be the only option if scheme deeds contain unusual features.

McQuade recalled an example where a clause in one pension scheme giving trustees a right of veto prevented a merger. “To merge it with that clause included in all… schemes, it was too much for the company to agree to,” he said.

Michaela Berry, partner at law firm Sackers, pointed out that the savings are greater in a full merger than where different sections are created, because legally the two sections – as in the case of Sainsbury’s – will still require separate valuations and accounts.

Full mergers are however more difficult to achieve, mainly because of the need for funding parity, “because the trustees need to agree to a merger and they’d want to make sure their members aren’t adversely affected”, said Berry.

There can be other hurdles to a full merger. “If it all goes into one pot, you have to look at the powers in the scheme, who controls what, check that there is no litigation in the scheme – it’s a lot more complex,” she said.

A segregated merger is easier, but Berry pointed out that the scheme that is transferring still needs to get a transformation certificate from an actuary.

Do economies of scale need a merger?

Of the two routes to merging schemes – a full merger or sectionalisation – Gilchrist agreed the latter “makes life easier because for a full merger you end up having to have schemes with the same funding level at the point of merger”.

Preserving existing benefit structures should not be an issue in either case, he added, as many pension schemes already have different benefit categories.

Despite the obvious advantages of combining schemes within the same sponsor group, many companies that could do so hold back.

“There is a lot of legal and actuarial work to do it… so lots of companies don’t do it simply because they’re not prepared to put in any upfront cost,” said Gilchrist.

Despite this, he predicted more mergers ahead, “because increasingly with corporate activity buyers don’t want DB schemes”. After merging schemes, sections of a business can be sold off without their share of pension liabilities.

Not all savings necessarily require a merger, however. Economies of scale in investments, for example, can be achieved even where schemes remain entirely separate.

Pinsent Masons partner Alastair Meeks said although combining schemes does tend to lead to “substantial” savings, mergers can bring up issues, such as covenant strength. Meeks said: “Another practical problem is that everyone does their due diligence and finds latent problems.”

While these might have been there for some time, the merger means they need to be addressed.

Trustees should reassure members

Meeks stressed the importance of clear communications. “Members will see their benefits move from one scheme to another and might be concerned that that puts them at greater risk. Recent press stories have only heightened that,” he said.

There is also a legal requirement to communicate the change.

Berry said that while merging pension schemes within the same group does not require members’ consent, notice still has to be given to them. Sainsbury’s is doing this on its website and by sending out letters, telling members they do not need to do anything, and explaining the benefits of the merger.

McQuade agreed with this type of approach. “I would want to make sure I was sharing the background with the members so they understand the reason for this and know they are being looked after,” he said.

This should be easy to do, because merging schemes should bring benefits to the members as well as the sponsor, he said. “If there weren’t you’d expect the trustees to argue against it.”