Pension pills

16 June 2004 By Edward Hadas

Pension liabilities could kill off the bid for WH Smith. And that’s not a oneoff. Pensions may become more of a feature of bids in future. Fund trustees are becoming more vigorous, and their interests clash with bidders that want to gear companies up to maximise equity returns.

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Pension liabilities are becoming an issue in UK takeover bids. Permira's £940m bid for WH Smith has reached a possible sticking point over the company's £200 £250m pensions deficit. And UK entrepreneur Philip Green has asked the board of Marks & Spencer to clarity its pensions position as a precondition for making a bid.

WH Smith's pension fund trustees have a particularly strong trust deed. They can set the level of contributions that the company has to make and even require the total deficit to be paid upfront. In this case, they that the proposed capital structure of Permira's bid for WH Smith would be dangerous for pensioners. So they are asking for the money to be paid quickly or for strong guarantees, according to a person familiar with their thinking. The guarantees they have suggested as acceptable are to rank pensions debt alongside bank debt, or for Permira to put assets from either the company of its fund up as collateral, according to that person.

The Pensions Act, currently going through parliament, will tighten the fiduciary responsibilities of pension fund trustees. It will also allow them to complain to a regulator if they feel that the plan is underfunded. The regulator can then impose a tougher contribution schedule.

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