The Pension Protection Fund (PPF), the UK’s pension lifeboat fund, has taken temporary control of high street retailer Mothercare’s defined benefit pension schemes in an effort to support a restructuring plan and avoid the company collapsing.
The PPF has said it would vote in favour of the restructuring plans on behalf of the company’s pension fund members.
Mothercare, which retails to parents of babies and young children, has proposed refinancing its business through a company voluntary arrangement (CVA), which would see it close 50 stores across the UK and agree rent reductions on a further 21.
Under the terms of the CVA, the PPF has assumed the rights of the trustees of the company’s pension funds, including voting rights.
Mothercare’s pension deficit stood at approximately £140m (€160.4m) on a PPF funding basis, although in its preliminary full-year results the shortfall was reported as £37.7m. The two schemes had combined assets of £351.5m at the end of March, the company reported.
Malcolm Weir, director of restructuring and insolvency at the PPF, said he welcomed Mothercare’s willingness to “listen and take on board our view that the CVA proposals should not be to the detriment of the pension schemes”.
He added: “Having received additional suitable assurances about the position of the pension schemes, we are able to support the CVA proposals as announced [yesterday].
“Our expectation is that the company will continue to take full responsibility for the pension schemes going forward.”
The PPF reached a similar agreement with another struggling retailer, Toys R Us, in December last year. However, the company failed to find a buyer and was declared insolvent at the end of February.
Mothercare has faced the twin pressures of rising rents and increased online shopping that have seen many UK competitors – such as Woolworths, Toys R Us and Phones 4u – disappear from the UK’s high street in recent years.
Clive Whiley, interim executive chairman of Mothercare, said it was clear the group needed an “appropriate resolution”.
“The recent financial performance of the business, impacted in particular by a large number of legacy loss-making stores within the UK estate, has resulted in an unsustainable situation for the Mothercare brand,” he said. “These comprehensive measures provide a renewed and stable financial structure for the business and will drive a step change in Mothercare’s transformation.”
Industry experts said the economic pressures on high street retailers remained “intense”.
Mothercare was “yet another example of a well-loved brand in the retail sector whose sponsor covenant has been unable to withstand the intense economic pressures on the high street”, said Richard Farr, managing director at Lincoln Pensions, the financial consultants.
However, he emphasised that the pension scheme’s trustees had to ensure the best deal for their members.
“The covenant risks in the retail sector have been building over recent years,” he said, “and while it is good to see that traditional restructuring techniques are now being applied to rescue groups such as Mothercare, trustees need to independently challenge and scrutinise their sponsors’ plans on a regular basis to ensure they continue to protect their members’ benefits as other creditors are being compromised.”
Mothercare is set to present its plans to creditors in the next few weeks. If its proposals are accepted, the company will reassume oversight of its pension schemes from the PPF.