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Money managers under the microscope

Trust the Cadbury trustee to get a deal

January 27, 2010

Warren Buffet may think Kraft isn’t doing a good deal by taking over Cadbury. With Kraft shares falling, Cadbury’s shareholders may not think the deal too sweet either and some disgruntled British consumers may be appalled that a much loved brand will be sold to a non-British group – and one that sells  chocolate symbolised by a lilac cow at that.

RTR292BEBut one party is sure to get a good deal: the Cadbury pension fund trustees.

While Cadbury fans are digesting the takeover news, the trustees have lost no time in seeking a dialogue with Kraft to make sure they do get a good deal for the workers they represent. Call it fiduciary duty if you like but be sure pension trustees, used to a sponsor that “stood behind the pension fund for more than a hundred years”, will give Kraft a hard and cold look to assess its credentials as a sponsor – what the pension industry calls in vaguely biblical terms “the covenant”. 

In theory there is no need for a fight — Kraft was swift to assure it would honour “the existing contractual employment rights, including pension rights”. But did the multi-national really know what this pledge would cost, at least in pension terms?

Almost certainly no, because truth to tell the pension trustees themselves do not know. The fund is waiting for the results of its triennial valuation, which should give an accurate picture of the fund’s financial shape.  Independent consultant John Ralfe told me he thought trustees could present Kraft with a cash injection bill of £200 million or more.

Whether the assessment of an independent consultant not involved with the scheme in question proves right or not, it is fair to assume this kind of money would still be a small price to pay for the successful completion of a £11 billion deal.

If it turns out to be more, Kraft will still be careful  not to antagonise the pension trustees because they may not be able to scupper a deal recommended by the board, but a prolonged struggle could attract the attention of The Pensions Regulator.

The regulator has the power to demand special contributions to the pension scheme involved. Kraft is not obliged to secure the regulator’s permission to go ahead, but it must obey if a contribution is required. Another unwelcome front in its march towards Bournville.

It may be curtains for arch-British Cadbury’s independence but the takeover will test the mettle of  yet another British institution, the pension trustee.

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