Leisure group Whitbread is likely to fill the deficit in its defined benefit scheme after having agreed the sale of coffee chain Costa to drinks group Coca-Cola, according to Numis broker Tim Barrett.
Barrett, head of travel and leisure research, says he expects that in the “worst case”, Whitbread will make a contribution equivalent to the scheme’s deficit.
Whitbread announced that it expects to receive around £3.8bn in cash from the sale of Costa.
We are in discussions with the trustees of the Whitbread Group Pension Fund to ensure the scheme is adequately funded and members are protected
The Pensions Regulator
“Before completion, Whitbread also expects to reach agreement with other stakeholders, such as the pensions trustees, in relation to the extent of contributions to the pension deficit,” its announcement read. The transaction’s completion is expected in the first half of 2019.
“Discussions with pension trustees and other relevant stakeholders will be conducted and an update on the amount and method to return proceeds will be provided in due course,” it added.
According to Whitbread’s 2018 annual report, a deficit recovery plan was agreed with the scheme after its March 2017 actuarial valuation.
The company pledged cash contributions of £85m a year for 2018-19 to 2021-22, with a final contribution of £57m in 2022-23.
As at March 1 2018 the scheme had an accounting deficit of £289m, down from £425m at March 2 2017. Its actuarial deficit sits at around £350m.
Costa’s liabilities probably weren’t huge
In April’s annual report, Whitbread declared its intention to sell Costa in order to focus on opportunities in the UK and Germany for another of its brands, Premier Inn.
At the time, the company envisaged undertaking a demerger of the group. “We have made significant progress with our strategy over the last two years and are now committed to a demerger of Costa,” chairman Adam Crozier wrote.
On Friday, Whitbread chief executive Alison Brittain said the sale “represents a substantial premium to the value that would have been created through the demerger of the business”. Whitbread acquired Costa for £19m in 1995.
Aidan O’Mahony, partner and head of covenant advice at consultancy Aon, queried whether the trustees themselves would be able to justify asking for a significant cash injection, given the potentially limited exposure Costa has to the £2.4bn Whitbread scheme.
When an employer is sold, its scheme’s trustees can normally demand a percentage of the scheme’s technical provisions or solvency deficit after carrying out a material detriment review, where they calculate “the worst case scenario” for the deficit, O’Mahony said.
“The pension benefits that have been built up – they’re probably unlikely to come from the Costa coffee shops,” he added.
Regulator involved in Whitbread talks
In August, the government closed its consultation on new powers for the Pensions Regulator.
Proposals include strengthening the notifiable events framework, which covers both scheme and employer-related events. It hinted at a new material detriment test.
The sale of a participating employer is classed as a notifiable event under the Pensions Act 2004.
Mark Smith, partner at law firm Taylor Wessing, observed that high-profile failures have led to increased pressure on the regulator in recent years. However, he said the majority of businesses took their DB obligations seriously even before the toughening of the regulator's stance.
“Ninety-nine times out of 100 it was already something very high up on the radar of businesses,” he argued.
A spokesperson for the regulator said: “We are in discussions with the trustees of the Whitbread Group Pension Fund to ensure the scheme is adequately funded and members are protected.”
Consider impact of dividends
As part of the recently agreed recovery plan, the company implemented measures to ensure that its commitment to shareholders would not be at the expense of scheme contributions.
“Until the next valuation, the trustee has… been given a promise of accelerated payments at a rate aligned with increases in ordinary dividends,” its report read.
“If ordinary dividends increase by more than 5 per cent a year, contributions will be accelerated at a rate in line with dividend growth minus 5 per cent.”
John Gordon, counsel at law firm Ashurst, advised that in an insolvency event, the scheme is more important than the shareholders.
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“The pension scheme and the trustees are an unsecured creditor of the company… but crucially, they rank above shareholders on any insolvency, in the priority order,” he said.
“Before a company pays a significant dividend, it should always be considering the effect of that dividend on the unsecured creditors including the pension scheme trustees, and that’s probably the thought process that the company has undergone in this case.”
