UK - A move placing Woolworths plc in administration highlights the need for trustees to closely monitor the state of the employer covenant, Redington Partners has claimed.
Woolworths released a statement earlier today in which it admitted, "discussions relating to the potential sale of its retail business have now ended", and there is "no longer any prospect of those businesses being able to operate as a going concern".
The high street chain, which sells a range of products from homewares to toys, rejected a takeover offer from Iceland Foods in August after it was revealed the deal would have left Woolworths with responsibility for the pension liabilities of all current and former staff. (See earlier IPE article: Pension demands kill Woolworths takeover bid)
Figures from the company's interim results for 2008 showed the value of the defined benefit (DB) Woolworths Group Pension Scheme fell from £316.8m (€374.6m) in February 2008 to £303m in August, with a deficit of £80.9m gross and £58.2m net of tax - although the results of the triennial valuation held on 31 March 2008 are still to be published.
Woolworths initiated a consultation earlier this year on plans to close the scheme to future accrual from 1 February 2009.
Its proposal was to replace the DB scheme with a group personal pension plan (GPP) with minimum contributions of at least 3% from members and 3% from employers, as it told members the provisional scheme funding reported by the actuaries at 31 March 2008 was a £147.1m deficit.
Although it is not clear how the decision to go into administration will affect the scheme and the consultation, in documentation relating to the proposed changes Woolworths stated if the company went into administration "the pension scheme may be entitled to go into the Pension Protection Fund (PPF)".
However, a spokesman for the PPF confirmed it has not yet received a Section 120 notice from the pension fund, which is normally sent by administrators or insolvency practitioners to request entry to the PPF.
If the company or administrators should take this route the PPF will then have 28 days from receiving the section 120 notice in which to decide whether the scheme is eligible for entry to the fund, and if it is it would then enter the PPF assessment period.
Woolworths had previously justified the planned pension changes on the grounds that the "financial position of the pension scheme, and the performance of the company, has deteriorated in the past two years. The provisional valuation from the pension scheme actuary showed that, in order to maintain the final salary scheme, the company would have to pay more than three times the current contributions each year, and this would only pay off the deficit over 10 years".
On the back of developments, Robert Gardner, partner and co-founder at Redington Partners, said: "The collapse of Woolworths highlights that trustees must not only measure, manage, and monitor risks within the pension scheme, but closely evaluate the financial health of the sponsor. As recession bites, the strain on corporate cash flows will intensify, further weakening employer sponsor covenants."
He pointed out the FTSE 100 is down more than 35% in 2008, and warned, "as the market capitalisation of a sponsor falls, a pension scheme can be at increased risk unless it is fully-funded".
Woolworths noted the parent company Woolworths Group plc is not entering administration, and confimred the company still in discussions with BBC Worldwide over the possible sale of Woolworths' 40% stake in the joint venture 2 Entertain Ltd.
Should this deal go ahead, the pension scheme would receive the first £50m of proceeds under the terms of an agreement made with the trustees of the scheme in January, after Woolworths received £385m of financing from Burdale Financial - a subsidiary of Bank of Ireland - and GMAC Commercial Finance.
The deal also resulted in Woolworths granting the pension fund a £63m 3rd lien security, as in February the preliminary results confirmed at the point of sale of its stake in 2 Entertainment "an equivalent amount of the 3rd lien security would be released" to the pension scheme.
Deloitte has been appointed as administrators for Woolworths plc and Entertainment UK, and Neville Kahn, reorganisation services partner at Deloitte, confirmed the companies will continue to trade and "stores will remain open past Christmas and employees in stores will be paid".
Dan Butters, reorganisation services partner at Deloitte, added: "We will be looking for a suitable buyer for all parts of the business. In the last 24 hours we have received expressions of interest from a number of parties for both the retail and wholesale businesses. We are working hard to ensure that any sale of the business, in whole or part, will preserve jobs."
IPE.com has been running the subject of employer security as this week's Talking Point.
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