GOING CAP IN HAND is never a comfortable experience. But there’s a difference between asking your parents for a quid to buy sweets and asking your parent company for £800m to shore up pension deficits.
In fairness to Fujitsu UK & Ireland, and its finance director Steve Clayton, the call did not exactly come out of the blue. Negotiations have taken place over the past year with a number of parties: the Tokyo-based parent Fujitsu Limited, the UK arm’s trustees and the Pensions Regulator. The parent company also had to run the fund-raising.
“If you’re part of a large global company like we are, I don’t want to be going to my parent company at short notice and saying, ‘I’ve run out of capital’,” says Clayton. The total deficit is £1.5bn, and is a sum total spread across Fujitsu UK’s three defined benefit pension schemes, which contain nearly 21,000 members.
“£800m is not a trivial sum,” he adds, but the contribution is vital to the future of the UK business. Clayton makes it very clear that the past year’s negotiations have been to secure the business’ long-term future, and the financial viability of the schemes.
Rather than simply shore up the scheme, the £800m is supplemented with tighter risk management around the schemes’ investments; it’s “not just filling a big hole in the deficit”, as Clayton puts it.
But the deal does free up cash for Fujitsu UK to use – some £75m a year. As we cheekily put to Clayton, is it burning a hole in his pocket? Some of it has been allocated, he says laughing.
“It’s kicking around at the moment but yes, we’ve got some of that already committed because we have investment committees that look at where we want to build our own capabilities and we’re also about to launch into acquisition growth,” he explains.
Just as the cash injection from Fujitsu Limited was well planned, Fujitsu’s business investments will not be made in a knee-jerk fashion, either. For Clayton, the £800m boost is there to put the pension schemes on a “firm financial footing”, while enabling Fujitsu UK to free up cashflow. The £800m agreement has also been integrated within a three-year strategy plan.
Yet the schemes’ trustees may make investment decisions, but they don’t sit within the remit of the finance function. So how firm is the footing on which Fujitsu now stands?
“Ultimately, that’s the responsibility of the trustees,” continues Clayton, “but we work very closely with them.” One of Clayton’s team is “actively engaged” with the investment committee.
Although it almost seems to be a given, Clayton also points out that you don’t want the trustees’ investment having an adverse impact on the financial statements.
The investments are tracked daily, also aided by Fujitsu’s professional advisers, who look at the volatility of both asset investment and liability – and how external factors can be best-managed.
“You can’t hedge everything out, but what we can do is to at least have some knowledge about sensitivities that change our assumptions,” adds Clayton. In companies with substantial defined benefit deficits, dealing with them is likely to become a big part of a finance director’s job, he explains.
The volatility issue is the one that is likely to cause most headaches – although FDs prefer to manage risk, it is very difficult to do so, with so many factors affecting investments outside of their control.
So, as part of Fujitsu’s agreement with trustees, de-risking of the schemes’ asset structure has also taken place, which should help Clayton sleep at night.
“It enables [the trustees] to work towards a broad objective that supports the company’s financial management objective as well,” he says.
However, this type of agreement cannot happen overnight, because the needs of the two parties – as well as the priorities held by the Pensions Regulator – are all likely to compete with each other.
“We want to free up cash to invest for business growth; pension trustees want to make sure they protect their members; we want to protect the members as well because we’re a responsible employer; and the Pensions Regulator is looking to make sure that we don’t increase the risk of defaulting on the pension payments,” explains Clayton.
So are there any lessons learned from the process that Clayton would pass to other FDs in similar positions? The key point he makes is that a long-term view must be taken – or the deficit will never be fully under control.
“The boil must be lanced,” he says. “Now, not everybody is in the same position as we are – I’m very fortunate that I’ve got an understanding parent company.” But, as has already been suggested, it wasn’t an easy process, and £800m can be spent or allocated in many different ways.
“It took a long time to convince them to make this decision because they’ve got competing demands. It could have been used by Fujitsu to make an acquisition in another part of the world, so I’m competing against a whole bunch of other issues,” he concludes.
“I think you have to be bold enough to recognise that getting a long-term solution is the only real solution.”
In Black and White
2009 – present CFO, Fujitsu UK and Ireland
2006 – 2009 Director for M&A, Fujitsu
2004 – 2006 Business assurance director, Fujitsu
2002 – 2004 Finance director for service delivery, Fujitsu Services
1993 – 2002 Various roles, ICL
While Fujitsu’s CFO has taken a big role in helping restructure and re-organise the company’s pension deficits, it’s a full-time job for his colleague Paula Evans, head of pensions & benefits.
With so many different, and colourful, pensions restructuring tools available in the marketplace, why did Fujitsu opt for the relatively simple model of cash and asset de-risking?
Evans explains the rationale for the company’s choice was that it was the option most likely to give the biggest return from a pension plan perspective.
“It really does secure the position for all those pension plan members because the assets are held directly and closely, rather than being caught up in some sort of external investment … There’s nothing quite so good as actually having the money in your hand,” says Evans.
The deal effectively brings forward eight years’ worth of contributions to the scheme, and this gives the trustees scope to shape an investment strategy for the longer term.
Echoing Clayton, Evans also points out that Fujitsu UK’s pension and finance functions will “work very closely and collaboratively” with the pensions schemes’ trustees in controlling and managing that investment.
“We’ve spent a lot of time building constructive working relationships with our trustee board, and that means we’ve all got clarity about each other’s needs and objectives. We’ve worked through quite a long and intricate process of negotiations,” she says.
No small task
When discussing pensions management, the topic of auto-enrolment cannot be far away. The process by which companies must, by law, enrol all staff into a pension scheme is by no means a small task for Fujitsu.
The UK business employs 14,000 employees in the UK, many of whom are based in areas of typically low employment, with a third of staff aged under 25. How has Fujitsu sold auto-enrolment to them?
“It’s been a busy nine months for me,” says Evans wryly. But Fujitsu has a strong defined contribution scheme that the company has constantly encouraged its staff – young and old – to take up.
The first auto-enrolled staff, of which there are 800, will come through to the scheme in June. Fujitsu has written to them, explaining auto-enrolment, and the company has included what Evans describes as a “very clear financial modelling tool” that employees can use to gauge the impact of auto-enrolment.
“We’ve had some people opt into that plan early, which is great from our perspective. It’s pleasing to see that people are getting within the programme and saving for their future and taking our money and doing that too. So it is positive to see more people saving for the long term,” says Evans.