Fujitsu beginning to feel the heat:
More than $1 billion has been wiped off the value of Fujitsu after the company’s European chief said it had a moral responsibility to provide compensation for its role in the UK Post Office Horizon scandal. https://t.co/29v9lRVMrU
— Sabah Meddings (@sabahmeddings) January 17, 2024
We learn from the FT this morning ;-
Fujitsu to suspend bidding for UK public contracts after Post Office scandal
Fujitsu has agreed to suspend bidding for UK public contracts pending the conclusion of a public inquiry into the Post Office Horizon scandal.
As I have pointed out recently, the livelihoods of thousands of people rely on the ongoing sponsorship of Fujitsu.
Thousands more rely on Fujitsu jobs for future benefits from Fujitsu’s various pension plans.
The failings of Fujitsu are not systemic but particular to the Horizon project. We should not allow those particular failings to drag down the company and impact all who work there and their many former workers in their pension schemes.
Let’s start with pensions
Despite headlines to the contrary, the deficit in Fujitsu’s pensions (principally the “ICL” plan) is not a “black hole”. It is down to the performance of assets, most notably the bond and LDI portfolios in 2022. The most recent notes to its financial statements make this clear.
IAS statement to Fujitsu’s most recent accounts
The hole can be filled and no doubt there are plans to fill it. But these plans revolve around a strong sponsor. That sponsor is indeed beginning to feel the heat.
It is in nobody’s interest that Fujitsu fails. The company is not a basket case nor the pension scheme.
Merryn Somerset Webb is right to point out that the precipitous fall in the Fujitsu valuation should have been foreseen by those exploring its governance
Where were all those activist/ESG governance focused shareholders when all this was happening? Fund managers.. remember that global stewardship role you insist you have taken on? https://t.co/UNqTszSZHK
— Merryn Somerset Webb (@MerrynSW) January 17, 2024
But the failings of Fujitsu do not appear to be systemic to the operations of the company and while the pension scheme suffered substantial losses to its asset base, there should be no implication of impropriety between trustee and sponsor. The problems of Fujitsu’s pensions are broadly the problems of the LDI crash.
The problems of Fujitsu as a sponsor are primarily to do with its governance and not its operation. Both problems can be fixed, though both problems were preventable.
Right now both the sponsor and its pension scheme is in need of capital support.
The Pensions Regulator has been promoting alternative arrangements for funding in such cases.
Capital backed journey plans can substitute for the deficit repair contributions which may become onerous if Fujitsu has to stump up mega millions for the post masters, can’t compete for new contracts and find BAU impaired by a loss in internal morale.
This looks a suitable case for a third party sponsor to bring capital backing to the plan. This could provide comfort to members of the scheme and employees of the company. It should also please the Pensions Regulator which has a duty to both members of the plan and to the PPF.
The Fujitsu ICL scheme is 90.7% funded at the most recent valuation. This is a shortfall of £339 million. It also has a deficit repair schedule in place which was introduced in 2021 when the deficit was £453 million. The payment due under that DRC schedule in 2024 is £41.47 million and these contributions rise by 3.4% annually. That DRC schedule will fully discharge the current shortfall in 2032 and if continued to maturity of the schedule would generate a surplus of £92 million.
Sorry Henry this does not appear to me to warrant bringing in external capital.
The Fujitsu Holdings 2023 Accounts make interesting reading from a UK Pensions point of view:
In the Strategic Report they set out the Company’s responsibilities and risks to various key parties. In the section dealing with employee matters they make no reference to any employer responsibilities towards the pension provisions for current employees. This is usual practice but does indicate the lack of acceptance of a corporate responsibility towards the pension prospects of the workforce.
Although the pension schemes are in net deficit on a technical provisions basis and deficit recovery contributions are being paid, on the IAS19 basis they are showing a surplus. That surplus fell by £575.3M during the year to 31st March 2023. Pension schemes without hedging vehicles in place showed substantially increased surpluses over that period. In Fujitsu, the rise in the IAS19 discount rate from 2.75% to 4.90% and changes to the other financial assumptions is reported as generating a gain of £1,365.6M during the year. It therefore appears that following a leveraged LDI strategy resulted in a reduction of around £1.9BN in Fujitsu’s reported Equity values. The reported loss on plan assets is £1.8BN. Although that there has been a loss is reported (in Note 28 to the Accounts) the extent of the loss is not clarified although it is clearly significant to a company with a total equity value at 31st March 2023 of £373M!
Similarly, Fujitsu reports that they have hedged mortality risks in what are essentially closed pooled risk schemes. Over the long term there is therefore an opportunity cost loss against scheme experience arising from this hedging against what is purely an assumption rather than recognising updated future liabilities discounted by an increased discount rate. It is worthwhile noting that the value of benefits paid out fell in 2023 over 2022 and Fujitsu reported the average duration of the defined benefit obligations had fallen from 16.3 years in 2022 to 13.3 years in 2023.
As well as sales required for collateral calls and further investment in LDI vehicles, the Schemes had to sell £197.5M of their income earning assets during 2022/23 (£198.1M 2021/22) to meet current benefit payments and administration costs . This meant that all the deficit reduction contributions paid over by the Company were used to meet current benefit payments rather than to build up the asset base to generate future income or to meet the capital costs of buy-out or buy-in.
Although the Accounting Policies Note refers to the IAS19 requirement to apply a ceiling asset value to a pension scheme asset value, Fujitsu does not appear to have done so. They are therefore effectively saying the asset value represent the amount they have an absolute right to by way of a refund before or after buy-out or alternatively a surplus which they intend to use in the future to grant further benefits to scheme Members. Let’s hope it is the latter!