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Threat to pensions of 60,000 Premier Foods workers Threat to pensions of 60,000 Premier Foods workers
(5 months later)
Premier Foods, the firm behind Bisto, Hovis and Mr Kipling, is sitting on a pensions timebomb that risks wiping up to a quarter off the value of retirement savings of 60,000 past and present workers if the debt-laden food manufacturer were to slip into insolvency, according to a leading pensions expert.Premier Foods, the firm behind Bisto, Hovis and Mr Kipling, is sitting on a pensions timebomb that risks wiping up to a quarter off the value of retirement savings of 60,000 past and present workers if the debt-laden food manufacturer were to slip into insolvency, according to a leading pensions expert.
The company stresses that bankruptcy remains a "highly unlikely event", noting that the business has bank facilities in place until mid-2016 and that it is ahead of schedule on turnaround plans. Trading performance has been improved by cost cuts and this week Premier reported 3.5% sales growth for its leading brands.The company stresses that bankruptcy remains a "highly unlikely event", noting that the business has bank facilities in place until mid-2016 and that it is ahead of schedule on turnaround plans. Trading performance has been improved by cost cuts and this week Premier reported 3.5% sales growth for its leading brands.
Should the company fail, however, Premier's undisclosed actuarial pension deficit, as of this month, is believed to be so large that it would leave the Pension Protection Fund facing a shortfall of up to £800m – one of its biggest ever hits. The PPF is a government-sponsored lifeboat which takes over pension schemes in the event of a company going bust.Should the company fail, however, Premier's undisclosed actuarial pension deficit, as of this month, is believed to be so large that it would leave the Pension Protection Fund facing a shortfall of up to £800m – one of its biggest ever hits. The PPF is a government-sponsored lifeboat which takes over pension schemes in the event of a company going bust.
The independent pensions consultant John Ralfe said: "Premier should be at the top of the Pensions Regulator's worry list. If it were to go bust the PPF would stand to lose around £800m before recoveries from selling company assets. It is difficult to see how a company with a market value of under £200m can properly support pension schemes with around £4.4bn of liabilities."The independent pensions consultant John Ralfe said: "Premier should be at the top of the Pensions Regulator's worry list. If it were to go bust the PPF would stand to lose around £800m before recoveries from selling company assets. It is difficult to see how a company with a market value of under £200m can properly support pension schemes with around £4.4bn of liabilities."
A detailed triennial valuation of Premier's current deficit is under way, but the company has told stakeholders the figures will not be released until early 2014. Three years ago, the actuarial deficit in Premier's two main pension schemes amounted to £474m, a shortfall which is expected to have ballooned since then.A detailed triennial valuation of Premier's current deficit is under way, but the company has told stakeholders the figures will not be released until early 2014. Three years ago, the actuarial deficit in Premier's two main pension schemes amounted to £474m, a shortfall which is expected to have ballooned since then.
The Guardian asked Ralfe to provide an up-to-date estimate of the actuarial deficit. He believes the shortfall has now reached £770m for the two main schemes. And the total actuarial deficit for Premier is about £800m.The Guardian asked Ralfe to provide an up-to-date estimate of the actuarial deficit. He believes the shortfall has now reached £770m for the two main schemes. And the total actuarial deficit for Premier is about £800m.
Premier's financial woes began with its ill-fated acquisition of RHM, the flour milling and bread group behind Hovis, at the height of the credit boom in 2007. The deal was financed with £2.1bn of borrowings underwritten by Royal Bank of Scotland. Combining RHM's pension scheme with existing Premier schemes left the enlarged group as the biggest pension fund sponsor of any stock market-listed company outside the FTSE 100.Premier's financial woes began with its ill-fated acquisition of RHM, the flour milling and bread group behind Hovis, at the height of the credit boom in 2007. The deal was financed with £2.1bn of borrowings underwritten by Royal Bank of Scotland. Combining RHM's pension scheme with existing Premier schemes left the enlarged group as the biggest pension fund sponsor of any stock market-listed company outside the FTSE 100.
Premier has struggled under the weight of its borrowings. Despite a £380m rescue equity issue in 2009, the group was forced in March last year to strike another rescue deal, this time with its 28 lending banks, led by RBS. Since then, Premier has embarked on a string of asset sales. Among the businesses sold were Hartley's jam, Sun-Pat peanut butter and Branston pickle. Proceeds of £370m were £40m over target, with the entire sum going to pay down bank borrowing and not repair the pension deficit. Pension trustees said they had agreed not to receive sale proceeds in order to "facilitate more favourable refinancing of the business when this is undertaken in 2015-16".Premier has struggled under the weight of its borrowings. Despite a £380m rescue equity issue in 2009, the group was forced in March last year to strike another rescue deal, this time with its 28 lending banks, led by RBS. Since then, Premier has embarked on a string of asset sales. Among the businesses sold were Hartley's jam, Sun-Pat peanut butter and Branston pickle. Proceeds of £370m were £40m over target, with the entire sum going to pay down bank borrowing and not repair the pension deficit. Pension trustees said they had agreed not to receive sale proceeds in order to "facilitate more favourable refinancing of the business when this is undertaken in 2015-16".
Trustees also agreed a year ago that Premier could temporarily halt its commitment to £40m-a-year payments to repair the group's pension deficit. At the same time, the trustees agreed to delay by two years any likely demand for a stepup in pension deficit payments once the current triennial valuation of the black hole was formally confirmed.Trustees also agreed a year ago that Premier could temporarily halt its commitment to £40m-a-year payments to repair the group's pension deficit. At the same time, the trustees agreed to delay by two years any likely demand for a stepup in pension deficit payments once the current triennial valuation of the black hole was formally confirmed.
The backlog of deferred payments will amount to £82m and must start to be paid off from the start of next year. In addition, the halted schedule of agreed deficit contributions must start up once again.The backlog of deferred payments will amount to £82m and must start to be paid off from the start of next year. In addition, the halted schedule of agreed deficit contributions must start up once again.
Combined with the likely widening in the valuation of the pension scheme shortfall, the backlog of deficit contributions could prove a concern to thousands of scheme members. That said, members need not be concerned as long as the company continues trading and can agree a schedule for repaying the actuarial pension deficit when the figure is confirmed next year.Combined with the likely widening in the valuation of the pension scheme shortfall, the backlog of deficit contributions could prove a concern to thousands of scheme members. That said, members need not be concerned as long as the company continues trading and can agree a schedule for repaying the actuarial pension deficit when the figure is confirmed next year.
Even if Premier does fail, the funds will transfer into the industry-funded PPF, ensuring all pensioners continue to have an entitlement to a pension. Those not yet drawing a pension who transfer into the PPF immediately lose 10%, though this does not apply to existing pensioners. In addition, on average, a further 15% of the value is eroded away over the lifetime of pensions due to the PPF's lower inflation indexation. A 25% hit to Premier schemes would be equivalent to £1.4bn.Even if Premier does fail, the funds will transfer into the industry-funded PPF, ensuring all pensioners continue to have an entitlement to a pension. Those not yet drawing a pension who transfer into the PPF immediately lose 10%, though this does not apply to existing pensioners. In addition, on average, a further 15% of the value is eroded away over the lifetime of pensions due to the PPF's lower inflation indexation. A 25% hit to Premier schemes would be equivalent to £1.4bn.
City analysts are broadly supportive of Premier's attempts to turn around its fortunes, though many suggest it continues to face considerable challenges. "Absence any significant growth it is hard to see the value in [Premier] equity for a while yet," said Charlie Mills, an analyst at Credit Suisse, last month. Martin Deboo, of Investec, said: "So Premier live to fight another day ... But a fight it will be." Both suggested the company, which holds its annual shareholder meeting today, might need to raise fresh equity, with Deboo putting the figure at £300m.City analysts are broadly supportive of Premier's attempts to turn around its fortunes, though many suggest it continues to face considerable challenges. "Absence any significant growth it is hard to see the value in [Premier] equity for a while yet," said Charlie Mills, an analyst at Credit Suisse, last month. Martin Deboo, of Investec, said: "So Premier live to fight another day ... But a fight it will be." Both suggested the company, which holds its annual shareholder meeting today, might need to raise fresh equity, with Deboo putting the figure at £300m.
Premier has a share value of £175m and had debts at the end of 2012 of £950m. The shares have attracted short sellers, who are estimated to have an interest in 7.9% of shares according to data from Markit.The March 2012 refinancing deal effectively gave Premier a breathing space to pursue the bank-enforced disposal programme. However, a string of deferred fees and pension contributions, as well as a step up in interest bills, will start to kick in from the start of 2014. The company is confident it can weather these hurdles.Premier has a share value of £175m and had debts at the end of 2012 of £950m. The shares have attracted short sellers, who are estimated to have an interest in 7.9% of shares according to data from Markit.The March 2012 refinancing deal effectively gave Premier a breathing space to pursue the bank-enforced disposal programme. However, a string of deferred fees and pension contributions, as well as a step up in interest bills, will start to kick in from the start of 2014. The company is confident it can weather these hurdles.
In a trading update this week, new chief executive Gavin Darby said: "Despite a continued challenging consumer environment, I believe we have the right strategies in place to make further progress this year."In a trading update this week, new chief executive Gavin Darby said: "Despite a continued challenging consumer environment, I believe we have the right strategies in place to make further progress this year."
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