With a growing number of ailing high street chains in the UK considering company voluntary agreements (CVA), the Pension Protection Fund (PPF) has outlined when it would back such deals.
High street retailers in financial difficulty, including House of Fraser, Toys R’ Us Mothercare and fashion chain New Look have recently announced that they are considering CVA deals, an insolvency procedure whereby the company in debt reaches a voluntary agreement with its creditors on the repayment of debt over a set period of time.
While CVA’s can offer an opportunity for firms to restructure their debts and terminate property lease obligations or onerous supplier contracts, with the board and shareholders remaining in control of the company, the agreement has to be signed off by at least 75% of the creditors. In some cases, the pension scheme may be the firm’s biggest creditor.
CVA deals are also subject to approval by the PPF, the lifeboat for UK pension schemes, which will consider how the deal affects the companies’ pension scheme and whether the firm remains viable after closing the CVA deal.
Responding to the recent increase in CVA deals being sought, the PPF stressed again that it would only approve CVA deals if they offered a “significantly better return” to pension scheme members than a company liquidation or going into administration.
The PPF also factors in that the pension scheme should be treated equally and not face disadvantages compared to other creditors.
In line with recent criticisms from the British Property Federation (BPF), which argued that CVA’s were used as a cost-cutting exercise by retailers aiming at rent reductions, the PPF also flagged up that CVAs often only addressed issues around the cost of property, rather than the overall viability of the business.
Another factor to be considered are dividend payments, the PFF outlined that if the firm still paid dividends throughout that period, they should be proportionate to contributions made to its pension scheme.
The lifeboat has recently confirmed CVA deals for Toys R’ US and Mothercare, while proposals by House of Fraser and New Look are being assessed.
As of May 2018, the PPF covered 5,588 schemes with a total of £1.611bn in assets and £1.705bn in liabilities. Its deficit has increased from £81.2bn to £94bn month on month, largely due to falling gilt yields, with the funding level currently at 94.5%.
