John Laing tackles deficit with £100m alternative financing plan

John Laing is the latest corporate sponsor to dip into the alternative financing toolkit with a composite asset-backed payment into its defined benefit pension scheme.

In February, UK energy major BG Group used the $460m (£299m) sale of two liquid natural gas carrier ships to quell its rising deficit.

John Laing’s 8,700-member scheme showed a deficit of £271.7m in its March 2013 triennial valuation, with a 75 per cent funding level. It closed to future accrual in March 2011.

The sponsor’s £100m contribution was structured through a combination of cash and equity interest in ongoing infrastructure projects, comprising:

• around 47.8m shares in subsidiary John Laing Environmental Assets, amounting to a 29.9 per cent interest in the group;

• a 47 per cent interest in the City Greenwich Lewisham Docklands Light Railway public-private partnership;

• a cash payment of just less than £21m, raised from the sponsor’s interest in Croydon Council’s Bernard Weatherill House urban regeneration project. This payment was adjusted to account for any change in the market value of the environmental group’s shares at its initial public offering on February 12.

The alternative funding arrangement followed a revised contribution schedule agreed between scheme trustees on December 4 2014.

This month the company will pay £27m, with subsequent annual contributions of £18m in March 2016 and £19m in 2017.

Companies can use their balance sheet to support pension schemes which may reduce pressure on cash in terms of contributions

Gary Squires, Alix Partners

A spokesperson for John Laing said: “The contribution was agreed as part of the IPO prospectus.”

Darren Redmayne, managing director at employer covenant specialist Lincoln Pensions, said certain features of an IPO could be “covenant enhancing” as it could boost a company’s growth.

“However it could also be the case that the IPO is being used to distribute value to shareholders while there is still significant deficit in the scheme,” he said. 

He added trustees should try to mitigate any covenant risks and negotiate a share of any proceeds.

Asset-backed or alternative?

Lynda Whitney, partner at consultancy Aon Hewitt, said asset-backed arrangements were part of a toolkit sponsors can offer trustees to provide additional security.

“A company will get a flow of income from this structure and... [can] promise that flow of income to the trustees as an upfront lump sum,” said Whitney.

However, she added there were often simpler and cheaper ways for schemes and employers to access alternative financing.

“It might be that they put money into an escrow structure rather than an asset-backed structure,” said Whitney.

“We’ve seen it generally being offered through stakes in subsidiaries. Waitrose gifted a chunk of ownership of Ocado, you can follow that through and see the return the trustee made when Ocado was itself [floated].”

Martin Hunter, senior consultant at Punter Southall, said there may not be the same level of opportunity for smaller pension schemes, but he added: “A slightly more standard approach should be more straightforward, it’s already been done in the marketplace.”

Gary Squires, managing director of pension advisory services at Alix Partners, said that in return for enhanced scheme security trustees might agree to a longer period for deficit recovery and reduced contributions.

“Companies can use their balance sheet to support pension schemes which may reduce pressure on cash in terms of contributions,” he said.