Will you still feed me? E.ON UK is paying 420m
| Author | Prickett, Ruth |
| Position | Cover Story |
When you hear the word "pension", do you reach for your HR director's phone number, your calculator or a large bottle of whisky? It's hard to believe that even the most conscientious FD hasn't felt like taking the last option a few times lately. Headlines screaming about a pensions black hole may have highlighted the issue, but they haven't offered any solutions. What's more, increasing staff awareness of the problem, although helpful in terms of transparency, has heightened the need for good internal communication--and for some action to communicate. Add to this the fact that pensions liabilities are inextricably bound up with changes to accounting standards, corporate governance issues and major legislative developments, and it's clear why the whisky might cause less of a headache than the alternatives.
Fortunately, not all the headlines are about deficits. Many companies have reacted positively to the crisis and their actions can generate good publicity, but the solutions are not cheap. At the end of January, E.ON UK demonstrated this when it obtained 420m [pounds sterling] from its parent company, E.ON AG, to pay off more than half of its pension shortfall.
"There were a couple of reasons why we wanted this cash injection," explains its CFO, Graham Bartlett FCMA. "We've just completed a triennial valuation that showed we had a deficit of 728m [pounds sterling] on a scheme valued at 3.7bn, [pounds sterling] but we're also introducing a new benefits package and we wanted to show to our staff and the unions that we were a responsible employer."
The company, which owns Powergen, has grown swiftly by acquisition over the past few years. It acquired East Midlands Electricity in 1998, TXU's retail and generation business in 2002 and Midlands Electricity in 2004. Each of the four firms had a different pension scheme and funding levels, so the organisation is planning to introduce a common employee benefits package, which will include a new pension scheme. The four sections have a total pension membership of 46,000 people, of whom 31,000 are retired. They will be consolidated into one scheme following the 420m [pounds sterling] payment.
"This was a value-neutral transaction," Bartlett stresses. "We worked with the unions and it had a positive effect on staff morale because it showed our commitment to our employees."
Later this year the company plans to close its final-salary defined-benefit (DB) scheme for new members, who will go into a career-average retirement scheme instead. The existing retirement age and company contribution levels will remain unchanged. The new benefits package will allow employees more flexibility to choose the level of their contributions.
"This is still a risk for the company and it's still much better for staff than a defined-contribution (DC) scheme. 1 expect to see lots more firms introducing this kind of scheme in future," Bartlett explains.
He believes that E.ON UK was fortunate that its parent company could raise this money. A huge amount of work was still needed to persuade E.ON AG to part with it. Bartlett had worked on two of the recent acquisitions, so he was no stranger to this type of negotiation, but he admits that it was tough. "'We've been working on it for a year," he says. "We are one of five market units belonging to E.ON AG. The other four areas haven't had the same problem, which made our situation harder to explain. We had to take the whole board in Germany through it before we could secure the money."
Many firms that have chosen to inject extra funds into their pension schemes have had to look elsewhere for the money. Marks and Spencer, for example, announced in March 2004 that it would pay 400m [pounds sterling] off its 585m [pounds sterling] deficit by means of a public bond issue. Other companies responded by looking closely at their investment choices. Boots, for example, hit the headlines when it withdrew its pension funds from equities and invested in bonds. John Ralfe, then head of corporate finance, defended this controversial decision in a letter to the Financial Times on January 14, 2002.
"The move to matching bonds is not about accounting, but about reducing risk for Boots' shareholders, creditors and pension scheme members," he wrote. "The Boots FRS17 pre-tax surplus at September 30. 2001 was 300m [pounds sterling]. Had we remained at the March 2000 asset allocation, this would have been a 50m [pounds sterling] deficit."
Ralfe, who was a consultant to the Accounting Standards Board on FRS17 at the time, pointed out that FRS17 would continue to make pension fund accounting more transparent over the coming three years. Shareholders, creditors and pension scheme...
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