Good news? The Arcadia creditors’ meeting has approved the Arcadia company voluntary arrangements (“CVAs”) on 12 June 2019. Less good news – there are continuing uncertainties; for instance, will the CVA actually restore the long term health of Arcadia and its pension scheme?
The prospect of creditors losing their shirts on an administration of Arcadia in the end proved too much: landlords would have been left with shops to re-let in a difficult market, trade creditors would suffer and the pension scheme would go permanently into the Pension Protection Fund (PPF) – all very unappealing prospects. Hence the creditors approved the CVA by the necessary majority. From the pensions perspective, administration would be likely to have triggered a repeat performance of the BHS dialogue with The Pension Regulator (TPR) pursuing the Green family for yet more funds.
Back from the abyss – the CVA terms in outline
The deal struck with the various landlords of Arcadia stores has been extensively reported, with some landlords doing better than others. Whether aggrieved landlords and/or other no-voters will try to upset the CVA remains to be seen. Under the CVA legislation affected parties have 28 days to challenge a CVA on specified grounds including, in general terms, procedural irregularity and/or prejudicial treatment. Challenges are surprisingly rare but recently there have been a couple of examples where creditors have decided to take the matter up in Court.
On the pensions front, the PPF together with TPR have been calling the tune. By way of background, as soon as notice is filed in Court of a proposed CVA, the PPF becomes involved in relation to the company’s defined benefit scheme. The filing of the CVA notice triggers a PPF “assessment period”. This means the PPF technically becomes the creditor for the company’s potential pension debt (and not the scheme itself), in relation to exercising creditors’ voting powers on the CVA proposal. This gave the PPF considerable clout in Arcadia given the substantial value of the potential Arcadia pension debt.
TPR’s price for facilitating the PPF agreeing the Arcadia CVA proposals is reported in the House of Commons Work and Pensions Committee letter 6 June to TPR as:
- £75m to be provided by Arcadia to the pension scheme;
- £100m committed to the scheme by Lady Green; and
- £210m in the form of security over assets.
Whilst the above total of £385m looks impressive, the Work and Pensions Committee letter of 6 June 2019 noted that the deficit in the Arcadia scheme was, based on the latest publicly available figures, between £537m and £727m depending on the measure used.
The haggling between TPR and the Green family before the CVA was approved has been well reported. At the 11th hour TPR asked for an extra £50m and then was offered and accepted £25 million. So this unscientific approach resulted in an additional £25m to the pension scheme. When set against the deficit figures mentioned above, the extra £25m is clearly nice to have but small beer in the overall context.
Of more importance is the reported £210m in security over assets – for the implications of the security proposal please see below.
Will the CVA do the trick?
Commercial aspect – commercially the upshot is heavily dependent not only on future trading conditions but also macro-factors such as the state of the UK economy including the economic impact of Brexit if and when it happens. It remains to be seen how many landlords will terminate leases under the terms of the CVA which could materially affect Arcadia’s viability.
These factors will dictate the covenant value of Arcadia on which the pension scheme trustees rely for future pension contributions to chip away at the scheme pension deficit.
Pension aspect – in the pension’s context, macro factors will play a key part e.g. performance or lack of performance of the investment markets and mortality rates etc.; and micro factors such as the astuteness or otherwise of the pension scheme trustees’ investment policy – one hopes investments are not caught up in the ‘Woodford’ fund difficulties.
But what of the reported £210m “security” over assets?
Security comes in many shapes and sizes. Some types of security are much more valuable than others. Hopefully worthwhile security can be put in place for the benefit of the Arcadia scheme – e.g. not low ranking security on the Green yacht. However, equally excessive security on corporate assets may jeopardise the chances of Arcadia’s commercial survival. The scheme trustees, TPR and the PPF need to be realistic in their demands to ensure they do not kill the goose that lays the golden namely here Arcadia.
There is another factor which may help considerably if Arcadia and its pension scheme survive long enough: the proposed extra powers for TPR following the BHS saga. Ironically, Sir Philip’s actions/inactions regarding the BHS scheme leading to tightening of TPR’s powers may prove to be the guardian angel for the Arcadia scheme.
TPR’s new powers
The main features of the new TPR powers are:
- wider powers to obtain information and to investigate;
- introduction of “Declaration of Intent”;
- strengthening TPR’s existing anti-avoidance powers; and
- new criminal offences.
Taken together this is a powerful armoury to protect pension schemes. Briefly:
Declarations of Intent – in March 2019 the Government announced “clearance” from TPR for proposed commercial transactions/grants of security would remain voluntary, but a “Declaration of Intent” will be needed, to be given by corporates to scheme trustees and to TPR, ahead of corporate transactions. This will enable TPR to intervene at an early stage if necessary.
TPR’s existing anti-avoidance powers, including issuing contribution notices to companies and to Directors personally – these will be strengthened. Failure to pay a contribution notice may result in criminal liability and a fine of up to £1 million. Wilful or reckless treatment of a pension scheme by a company/its directors will become a criminal offence punishable by up to 7 years imprisonment and/or unlimited fines.
Joker in the pack – new pension legislation will be needed for most of these new measures. The Government is likely to consult later this year on Declarations of Intent. Given the Brexit legislative logjam, the necessary new legislation to introduce TPR’s new powers may not be passed until 2020 or even 2021. If Arcadia and its pension scheme survive that long, the protection of schemes and their members will then be much stronger.
Whether the pendulum will then have swung too far in favour of DB pension schemes compared with other company creditors, and indeed shareholders’ interests, are interesting topics beyond the scope of this present article.
So having drawn back from the abyss following approval of the Arcadia CVAs, challenges remain. One waits to see whether Arcadia and its pension scheme can successfully navigate the next few years – the above new pensions legislation once enacted will help to bolster the prospects of survival.
Companies and their directors as well as scheme trustees will need to keep a close eye on legislative developments.
Eventually one will be able to assess whether for Arcadia and its pension scheme one can truly say, “All’s well that ends well”.