All seven of the proposed company voluntary arrangements (CVAs) in respect of the Arcadia Group were approved last week, on 12 June 2019. The vote had been delayed by a week in order for Sir Philip Green to negotiate with its landlords such that the proposals would be accepted.
What does this mean?
As the detail of the CVAs still emerge, Sir Philip Green’s plan involves closing an initial 23 of Arcadia’s 566 UK and Irish stores and rent reductions of 25% to 50% across 194 locations over three years (this was a negotiated position from more drastic cuts originally sought). The hook for many of the landlords was perhaps to accept this or for the Arcadia Group to fall into administration. Despite considerable protest, this potentially demonstrates the shift in power between landlords and their tenants, particularly where large and numerous properties are involved.
Whilst it has been announced that that the future of the Arcadia Group is now on a much firmer footing, entering into CVAs is no guarantee of survival. Both Toys r Us and BHS carried out CVAs but nevertheless collapsed into administration.
What does this means for the Arcadia Group’s two defined benefit pension schemes?
The Arcadia Group’s landlords are not the Group’s only large creditors. Following pressure from the Pensions Regulator and Rt Hon Frank Field MP (Chair of the Work and Pensions Committee), the trustees’ of the Arcadia Group’s defined benefit pension schemes were offered security over Arcadia Group assets valued at £210 million and a £100 million cash injection over the next three years, as part of the CVA deal.
Whilst the Pension Protection Fund (PPF) and the Pensions Regulator have agreed to the amended CVAs, and whilst this deal will save the Arcadia Group schemes from falling into the PPF for the time being (the approval of the CVAs will result in the schemes coming out of the PPF assessment period that they were in), the Work and Pensions Committee remains concerned about the schemes’ future, asking further questions of the Pensions Regulator on the day the CVAs were approved last week.
Additional questions mainly surround the detail of the £210 million security package being offered, namely where these assets are located (in this country or outside), why the package was acceptable to the Pensions Regulator instead of cash and whether there could be other claims by creditors on these assets. The Pensions Regulator may be unable to disclose any more information to Frank Field on the basis that it might be restricted under the Pensions Act 2004, but it is yet to respond. It may be that the trustees of the Arcadia Group schemes intend to enter into some form of asset-backed contribution arrangement, although no such information has yet been divulged.
Either way, in light of the BHS pension fiasco at the time and Frank Field’s long-time and vocal criticism of Sir Philip Green, it is extremely likely that the developments surrounding the Arcadia Group’s defined benefit pension schemes will be closely watched by many.
What does this means for the future of defined benefit pension schemes more generally?
It is no surprise that many surveys of defined benefit schemes show they are increasingly closing to future accrual, with only 4% of such schemes in the country still open to new members. John Lewis is the latest UK high street retailer to announce it intends to close the large defined benefit section of its pension scheme from April 2020 to manage its liabilities, noting that in the last 12 months, its pension costs were more than four times’ the total employee bonus for the year.
While there are still approximately 11 million savers relying on defined benefit pensions for their retirement, many companies, trustees and the Government alike are starting to look at other options to the traditional model, such as the creation of consolidations and superfunds. Whilst the pension aspects of the Arcadia Group’s CVAs may well see the schemes and its members in a better position than entering into the PPF, it is apparent that these types of pension schemes, in their traditional format, are increasingly unsustainable for businesses, and other options need to be explored to best protect the members of these schemes.