Wilko owed £625m when it collapsed, leaving the pension fund £50m short
In its latest published accounts for the year ended 29 January 2022 , the Wilkinson Group Retirement Benefits Scheme had assets of £203m and liabilities of £219m – an accounting deficit of around £16m. The deficit is now reported by the administrators to be £50m.
Members of the pension scheme have a right to feel confused; what is really going on?
The deficit for Wilko’s defined benefit scheme, which has 2,000 members narrowed considerably since 2019 as the company injected more than £4m a year to help support it . Wilko paid in £8m last year. I do not have access to details of the Wilkinson Pension Scheme’s investments but typically, the funding position of a pension scheme should have improved since January 2022, even if it lost money in the LDI blow-up. This is down to the way liabilities are valued. Wilkinson’s liabilities should (on a marked to market basis) have fallen more than its assets, meaning the scheme should not now be “in deficit” – assuming it had a sponsoring employer.
But when a company fails, the calculation of the deficit rises on the assumption that no further contributions will be paid into it. This being the case, the deficit (or surplus) is based on buying out the liabilities with an insurance company .
PWC’s administrator’s report tells us that on that basis, the fund was just over £70m in deficit , but had security over £20m of Wilko’s property, reducing the money required to plug the gap to £50m.
The state of the pension fund – were it to be valued on an ongoing basis is unknown but it might prove an attractive proposition to a sponsor with the financial clout to convince the trustees, their advisers and the Pensions Regulator, that they can make pay pensions in full.
The current state of the fund is important. The Wilkinson Pension Fund now sits in PPF assessment in the penumbra of schemes such as Debenhams that may be viable to a sponsor prepared to take them on , but not funded to a level to be acceptable to an insurance company.
Unless a new sponsor for the scheme can be found, the 2,000 members of the Wilkinson pension fund may face a cut in their pensions depending on the nature and status of the pension promise they have. Pensioners will be least affected, those to still await their pension being paid – more affected. The larger the pension promise, the greater the reduction in pension .
As far as Wilko is concerned, the game is over, but the Wilkinson Pension Scheme is in “extra time”.
Are the Wilkinson family and other shareholders to blame?
It appears that despite the company’s looming insolvency, the company’s executive agreed to pay shareholders dividends. Wilko’s family owners have paid themselves £9m in dividends since 2019, according to administrators, as underlying profits halved from £33m to £16m and sales slid by more than 15% to £1.31bn.
This is as nothing to the £63m payout made in 2015, when one half of the family sold their shares to another
The Pension Regulator has said that it is looking into this. It should do.
If the deficit contributions (see above) were agreed by the trustees, employer and TPR as sufficient to return the scheme to surplus, then normally, the dividend can be paid once the deficit contributions have been made. But if the payment of the dividend is likely to see the company run out of cash and fail (as may have been the case at Wilkinson), then the trustees needed to be on top of this and report the payment to the Pensions Regulator.
In any event – it looks like the “covenant assessment” of Wilko by its pension scheme turned out wrong. In retrospect, the dividend payments have contributed to Wilko’s insolvency and the trustees must be rueing their payment – just as the unsecured creditors do,
The Wilkinson family have so far not had to comment publicly about the dividend situation but this looks like changing. The Times reports
Nadine Houghton, the national officer for the GMB union, urged the business and trade committee to call her to give evidence.
“She must explain why there is a £56 million hole in the pension pot and what she will do to plug it, given that she and her family extracted £77 million during the past ten years,”
The administrator’s and union’s numbers differ but the substantial issue is the same. Is Wilko analogous to BHS and are the Wilkinson’s in the same awkward position as the Green’s. Philip Green was required to give evidence to parliament’s work and pensions committee as the GMB would have the Wilkinsons do.
A quick settlement with the Wilkinson family would not plug a £50m shortfall and give the scheme a chance of being bought out by an insurer. However, it might mean that a commercial sponsor, confident of managing the scheme on an ongoing basis, might be found. A settlement would suit everyone, not least the WPC and TPR.
A settlement was found for BHS which, despite a deficit and no sponsor, stayed out of the PPF. The Wilkinson pension scheme members should not give up hope. The Pension Regulator has a job to do and the Wilkinson family are far from out of the wood.
These numbers do not compute. TP Liabilities of £219 million will have declined by at least 30% due to the increase in gilt yields since 2022 – making them now around £155 million. Buy-out costs are perhaps 20% higher than TPs – so £30 million higher. Total buy-out liabilities of £185 million. If the deficit is £70 million, assets must be £115 million – down from the quoted £203 million by 43%. Some schemes have lost that much through the misuse of leveraged LDI but they are few and far between. This £70 million figure really does look to be ‘kitchen-sinking’.
It also raise an important question – why should this investment loss be considered a the responsibility of the shareholders – they did not set the investment strategy (if that is what causes the shortfall.) At that valuation date, the shortfall of £16 million was more than covered by a contingent asset of £20 million.
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A S89 report from TPR in 3-4 years’ time might give a fuller picture including –
1. S179 drift (PPF liability progression).
2. Existing Securities and Inter-Creditor Agreements (Who gets paid first, with what security).
3. New money and re-financing realities, options or restrictions. (Who provides the cash?)
The reality of loss making entities is the move from equity holder control to bond or lender control. If new or additional equity finance isn’t available (illiquid family wealth or it’s just too risky an investment) the financing consideration moves to lenders. Asset backed lending has limits around property values (for retail use or change of use value). Stock backed lending is similarly constrained by profit making sales and margins. The pension fund won’t be advancing cash or releasing existing security or be rushing to move down the priority of payment queue. No cash, no business.
To date, all governments have decided against requiring all DB schemes to be fully funded on a buy out basis at all times. Instead, to protect members after an employer insolvency, the PPF was created. Since then, an ASW situation cannot arise.
If the PPF is good enough protection, then let’s celebrate the fact that no DB scheme is an island thanks to the PPF and that Wilko pension scheme members are protected by it.
If PPF benefits are not good enough for to be happy about a scheme transferring to it, then let’s improve the PPF.