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P&O pensioners should sit tight despite fund concerns

By firing 800 staff through a pre-recorded video message, P&O Ferries hit the headlines and, by its own admission, broke the law.

The company claims that cutting costs, replacing its employees with cheaper agency staff, is needed to ensure its survival, after it lost £100mn in each of the last two years, thanks to Covid travel restrictions.

It has already made voluntary redundancies, as well as selling two ships, and closing its Hull-Zeebrugge route. It has negotiated some financial breathing space — a 24-month payment holiday on bank borrowings, and a 12-month pension contribution holiday. Its owner — the Dubai-based DP World — has also provided a bridging loan.

For P&O Ferries to raise questions of its survival is unsettling for thousands of pension scheme members. So are the disturbing reports of how much the company owes its pension schemes.

Worryingly, this concern may encourage members to transfer out — something that may be against their best interests, as we saw in 2017 in the case of British Steel pension scheme members.

P&O Ferries has three separate UK pension schemes, with a total of £1.2bn liabilities under IAS19 — the accounting measure for all pension schemes — at December 2020.

The P&O Ferries UK pension scheme had £233mn assets and £249mn IAS19 liabilities, a £29mn deficit. If the company did go into administration, the scheme would enter the Pension Protection Fund (PPF), the government-established lifeboat. As a minimum, members would receive PPF compensation, on average about three-quarters of their full end-to-end pension promise.

P&O Ferries is also a member of two industry wide multiemployer schemes — the Merchant Navy Ratings Pension Fund (MNRPF) and the Merchant Navy Officers Pension Fund (MNOPF) — both with dozens of different employers. Because they are “last man standing” schemes, each employer is jointly liable for all the schemes’ obligations.

If P&O Ferries did go bust, the good news for members of these two schemes is that instead of getting lower PPF compensation, their full pensions would be paid by higher deficit contributions from other employers.

At March 2021, MNRPF had £1.3bn assets, and 20,500 members. From 2014 to 2021 employers paid £390mn deficit contributions, including £70mn from P&O Ferries, and the scheme expects to be fully funded by 2027.

It has been widely reported that P&O Ferries’ share of the MNRPF deficit is £146mn. But since the total actuarial deficit at March 2021 was stated to be just £56mn, it is not clear how P&O Ferries share can be as high as £146mn.

The total 2021 buyout deficit — the amount needed to transfer all pension liabilities to a third-party insurer — was £203mn, so even if the £146mn is part of the buyout figure, it still looks too high. MNRPF should urgently provide some detail to clear up this confusion.

Under the “last man standing” principle, Stena Line would be on the hook for about a third share of MNRPF deficit contributions. Other employers, with much smaller shares, include Maersk UK and Esso UK.

MNRPF runs a very risky asset allocation strategy, with only 40 per cent in matching assets: the rest is a complex and costly mish-mash of equities, hedge funds and private equity, with 20 fund managers, and a gaggle of advisers, including its own PR firm.

In the past two years it has spent a whopping £25mn on administrative fees — half the deficit contributions paid — including £17.8mn on legal fees. Although these legal fees are not explained in the annual report, they may relate to a court case relating to ill health early retirement.

MNOPF is much larger than MNRPF, with £3.2bn assets, but a similar number of members — 22,800.

It is extremely well funded, with enough assets at March 2021 to buy out 99 per cent of liabilities with a third-party insurer. It runs a much less risky asset allocation strategy than MNRPF, and already has £2.3bn of bulk annuities exactly matching its liabilities, mainly with Pension Insurance Corporation, the most recent completed in February.

P&O Ferries has given legal charges to each of the three pension schemes over a number of individual ferries, which would be sold to reduce deficits, if the company did go bust.

This security should cover MNOPF’s small buyout deficit, but P&O Ferries’ UK scheme and MNRPF would still have buyout deficits, and would then claim as unsecured creditors against the value of P&O Ferries’ liquidated assets.

Although the company’s assets — mainly ferries — have a £420mn book value, £310mn has been given as security to creditors, including the pension schemes. After the other secured creditors had been paid from “distressed” asset sales, it is not clear how much would be left for unsecured creditors, including pensions.

The Pensions Regulator has powers — recently strengthened — to pursue “connected parties”, especially the company’s owners, when a company goes bust with a pension deficit. In 2017 it famously squeezed £363mn from Sir Philip Green for the BHS pension schemes.

But to be legally liable, the owner must have taken “corporate actions”, over and above just owning the company. Based on public information, it seems unlikely that DP World would have any legal case to answer.

Nonetheless, deep-pocketed DP World could, and should, choose to immediately transfer all P&O Ferries’ pension obligations to a new special purpose company, under its guarantee, responsible for paying deficit contributions as they become due. This would reassure worried members that their full pensions should be paid, regardless of what happens to P&O Ferries.

Meanwhile, despite the uncertainties, members should not rush to transfer their pensions.

John Ralfe is an independent pension consultant. Twitter: @johnralfe1

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