The publication yesterday of preliminary results for the WS Atkins Group revealed that the Group’s pension deficit on the accounting basis increased to £440 million from £298 million, a 47% jump, despite a strong performance of the scheme assets. The accounting pension deficit is very similar in size to the Group’s borrowing (around £440 million) and due to the combined impact of these two items, Atkins’ balance sheet shows an overall net liability position. However even compared to the Group’s market capitalisation of £695 million, the pension deficit appears to be fairly material.
Commenting on the impact of the pension funding position on the corporate balance sheet, Lorant Porkolab, a senior consultant who leads the Covenant Advisory practice of Punter Southall Transactions Services (PSTS) said:
"The pension position is obviously a major risk for the Atkins Group and it seems to be a significant concern for investors too. Based on the 2009 accounting figures, more than 90% of FTSE250 companies had a better funding position than Atkins, so even relative to other UK businesses of similar size, the Group has some catching up do on the pension front.
"However, this would require channelling some of the cash generated by the Group to its pension scheme, which is expected to be around £37 million this year - more than 30% of the Group’s operating profit.
"It is not surprising that investors are concerned about the potential volatility that the £1.3 billion pension liabilities on Atkins’ balance sheet represent for the business. However, the trustees of the Group’s pension scheme must also be equally concerned about their exposure to the sponsor as unsecured creditor, and therefore keep a close eye on developments regarding the Company’s financials to fully understand their covenant implications. In addition to security, affordability of the £37 million contribution requirement must be another potential area of concern for the trustees. Given the industry in which Atkins operates, the significant public sector cuts we can expect are likely to have a material impact on the Group’s contracts and profitability, but the true extent of these and whether they will affect what the employer can pay into the pension scheme remains to be seen.
"There is no need for the trustees to panic, but ignoring their covenant risk exposure and not managing that prudently is not an acceptable alternative. They should monitor closely the Company’s financial position, prospects and the wider economic and market developments that can affect its contract portfolio. Indeed, this is what the Pensions Regulator expects from all trustees as it indicated in the consultation document on monitoring employer support, published earlier this week."
Ends
For further information or to speak with Lorant Porkolab of PSTS, please contact:
Andy Fleming on 0207 786 4823
London Employer Masterclass (September)
