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Pension politics prompt a need for less trustee passivity

www.breakingviews.com

When does it become helpful for managers to boast about the bad shape of their staff pension plans? When their companies are under siege from hostile bidders. And what should pension fund trustees do about such boasting? Become more independent, as the new UK law suggests. Those are two of the lessons from the recent takeover flurries over Marks & Spencer and WH Smith, two troubled UK retailers.

Take M&S first. The company has a pension problem. The size of the problem depends on the accounting methodology. According to the old SSAP 24 standards, the deficit was relatively small – £185 million against total fund assets of £3.6 billion. The newer and more conservative FRS17 calculation came up with a more substantial £470 million ($865 million).

But a much higher number can be concocted. During the recent takeover fight, the company released a range of actuarial valuations. The most conservative, based on investing only in risk-free bonds, suggested a deficit of £1.8 billion. For a company with a market capitalization of about £9 billion, a pension deficit that size would make a big difference to shareholders. Had Philip Green succeeded in his takeover bid – which would have involved much higher leverage – the gap would have been enormous.

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