Defined Benefit 

FirstGroup takeover deal faces pension scrutiny

FirstGroup takeover deal faces pension scrutiny

A bid from US private equity firm Apollo to buy UK rail operator FirstGroup could face extra scrutiny to ensure members of travel firm's pension scheme do not lose out, as shadow Transport Secretary Andy McDonald wants assurances retirement benefits will be protected in the deal.

FirstGroup, which runs the South Western Railway and Great Western Railway franchises, announced on Wednesday (11 April) that it was rejecting a takeover approach from Apollo.

The company didn’t say how much the private equity firm had offered, but its shares rose more than 8 per cent after the announcement on 12 April.

In the meantime, Mr McDonald revealed Labour “will be seeking urgent assurances from the government that this deal protects employees and their pension schemes”.

He added: “If such guarantees cannot be provided, we will be calling on the government to block the deal.”

According to FirstGroup’s annual report, it has defined benefit (DB) liabilities worth £4.9bn, which is more than triple of the value of the company’s market capitalisation, at £1.3bn.

The Pensions Regulator (TPR) should also be involved in this discussion, since it is expected that Apollo will have to apply to the regulator's clearance process if the takeover goes forward.

This is a voluntary process, but without it the watchdog could be forced to use its anti-avoidance powers.

A spokesperson at TPR said: “Generally speaking, we expect any business planning a major corporate transaction, such as a takeover, to identify if there is potential material detriment to a pension scheme and explain how they will mitigate against that detriment.”

This is a similar situation to the Melrose takeover of GKN, where the transaction was only approved after a £1bn deal with the GKN trustees was reached.

According to Darren Redmayne, chief executive of Lincoln Pensions, this “is another example of an iconic British company subject to a takeover bid where pensions are at the absolute heart of whether the deal happens or not.”

He said: “It is vitally important that shareholders are not the only beneficiaries in these situations; equitability of treatment is key. 

“Shareholders getting a premium often involves a pension scheme being exposed to greater risk, particularly if it turns out to be a leveraged bid weakening the pension scheme covenant.”

Mr Redmayne also said that TPR is in the process of getting its powers strengthened through the government’s DB white paper “to reflect this reality, but is not there yet”.

He added: “Directors responsibilities have been thrust into the spotlight and they will be aware that their actions will be subject to increased scrutiny.

“To this end, when deciding whether or not to recommend a takeover proposal they should consider, and crucially show that they have considered, their obligations to the pension schemes alongside shareholders.

“In the meantime it is incumbent on all stakeholders to work together to ensure an optimal outcome for all.”