Funds Hub

Pensions, mergers and the Spanish (and otherwise) Inquisition

Spare a thought for the UK Pensions Regulator:  is losing its CEO next month (to a new agency set up to educate the UK public on money and financial matters) right at the time when its actions will be scrutinised.

Iberia and BA are telling the markets they want to merge, but the 3.7 billion pound BA pension deficit is also telling one or two things to the shareholders and investor squad. That is why what the Pensions Regulator says to BA’s plans to face the pension black-hole is very important.

Will it approve the plan? Will it require more cash? Will Iberia stomach any additional contributions?

Whatever it does, the regulator is bound to attract criticism and in the full glare of international publicity: if it asks for more assets and Iberia leaves, it will be blamed for scuppering the deal.  If it agrees to the BA recovery plan, some will say it let the air carrier off the hook.

I see the holy fathers of the XXI century Spanish Inquisition — aka media, analysts, shareholders, stakeholders etc — gather to pass judgment  on this pension conundrum.

Or to put it in aviation terms: the regulator is in for a Catch 22 situation, and just for doing its job.

Trust the Cadbury trustee to get a deal

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.

But 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.

Morning line-up

Hedge fund stories from the past 24 hours from Reuters and elsewhere:

Renaissance CEO Simons to retire – Reuters

‘Cruz missile’ returns with a hedge fund – WSJ

Swiss bank fund of funds adds Harvard chief risk officer – Finalternatives

Banks offering credit again in hedge fund land grab – Reuters

EU regulator says hedge fund plans need rethink – Reuters