Aviation services and distribution provider John Menzies is in talks with trustees over possible changes to its pension scheme, as the group considers splitting its two businesses under mounting pressure from activist investors.
German investor Shareholder Value Management and Swiss fund Lakestreet Capital Partners have gained control of 10 per cent of the Scottish company between them, and have both called for the hiving off of the two businesses.
Experts have said that while the current climate will mean the Pensions Regulator and indeed the rest of the world will keep a close eye on corporate transactions, increasing a sponsor's profitability should bode well for scheme funding levels.
In John Menzies’ annual report, chair Dermot Smurfit announced that a review of the company’s structure “will include looking at whether our two operating businesses are best placed to prosper while they are part of one group”.
If a business actually spots their difficulties early enough in the process and takes action to improve their business and therefore be better able to fund the pension scheme going forwards, then I think that should be welcomed
Mark Smith, Taylor Wessing
A spokesperson for the company added that the chair of John Menzies is leading a review of the structure of the group in order to maximise shareholder value.
“Management have already engaged with specialist advisers and our pension trustees, and work is underway to evaluate possible changes to structure of the pension scheme in such a way as to give the board the maximum amount of flexibility in future,” the spokesperson said.
Shareholder Value, which acquired its 7 per cent stake in the company in July, said its analysis showed that a rearrangement of the corporate structure would benefit both shareholders and the scheme.
“Holding on to the current flawed corporate structure will most likely lead to continued decreasing profitability at John Menzies plc. In our view this poses the single biggest threat to John Menzies plc’s pensioners,” said Gianluca Ferrari, analyst at the investment house.
“Shareholder Value has conducted a very detailed analysis of the process of splitting John Menzies Plc and the effect on the John Menzies Pension Scheme,” he continued. “We concluded that John Menzies plc can, and in fact should, be split in a way that will protect the pension scheme’s covenant.”
Negotiating the split
John Menzies’ recent company reports and accounts showed the £347m scheme to be in deficit by £52.7m on an IAS 19 basis.
Defined benefit schemes' funding levels have been subject to intense scrutiny by the media and parliament, with the Work and Pensions Committee seeking feedback on a potential expansion of regulatory powers to include blocking of corporate transactions where the scheme is threatened.
Mark Smith, partner at law firm Taylor Wessing, said trustees should be alert not to allow their covenant to be weakened, but they should also recognise that sensible restructuring may improve that covenant.
“In the current climate there’s obviously and understandably a lot of speculation around and comment on employers who can’t afford to meet their pensions liabilities, and what that means for members,” he said.
“But if a business actually spots their difficulties early enough in the process and takes action to improve their business and therefore be better able to fund the pension scheme going forwards, then I think that should be welcomed,” he added.
Smith said John Menzies and its scheme would likely be considering three broad options, including a direct splitting of the scheme’s liabilities and assets according to which part of the business they relate to.
Other options might involve leaving the scheme as it is, but obtaining funding commitments from both new businesses, or dividing the existing scheme into two formally segregated sections.
“A key point will be the trustees’ assessment of the covenant of the two businesses and which liabilities they are going to support, because it may be that one side of the business is stronger than the other,” said Smith.
He added that the uncertainty arising from the potential split in the sponsoring employer, combined with the difficulties facing all DB schemes at the moment, might lead the trustees to seek extra guarantees from the employers.
“If business B is weaker than A [the trustees] may be comfortable with it at a combined level but at a separated-out level they may be less happy,” he said.
