Struggling toy retailer Toys R Us has been instructed to pump £9 million into its ailing defined benefit pension scheme by the Pension Protection Fund (PPF).
Defined benefit pensions pay a guaranteed income in retirement linked to employees’ salaries and length of service. However, the rising cost of maintaining these schemes is putting employers under pressure.
The PPF – which is funded by a levy on member schemes – exists to pay compensation to employees if their employer collapses and the scheme fails.
Toys R Us is currently restructuring its finances as part of a proposed ‘company voluntary agreement’ (CVA). This is likely to involve the closure of 26 stores in the UK, which will result in up to 800 job losses. However, the PPF will not agree to the restructure unless the firm’s pension gets its necessary cash injection by Thursday (21 December).
The demand puts Toys R Us in a difficult position. It needs the support of the PPF as if the CVA is not agreed, it is likely that the high street retailer will go into administration – a move that would result in 3,200 job losses. However, stumping up the money could in turn hasten its demise.
Talking to the Today programme on BBC Radio 4, retail consultant Richard Hyman suggested that the PPF was wanting to be seen to be taking a tough stance on the retailer, following the furore that surrounded the last high street retailer to fall into the hands of the PPF, BHS.
Commenting on the demand being made of Toys R Us, Nathan Long, senior pensions analyst at Hargreaves Lansdown says: “The PPF is rightly taking a hard line against Toys R Us, once again proving that it is no pushover when it comes up against businesses which are needing to offload their pension liabilities. The PPF is funded by schemes that are still running, so it is imperative that this safety net is not placed under undue strain as more and more schemes fall into it.
“Christmas will be an unsettling time for staff, but at least members of the pension scheme know that they will still receive a pension, even if at a slightly reduced level.”
Although the PPF is not a creditor of Toys R Us, it has a say in the proposed CVA because it has a vested interest in the future of the company. Should it fail, the PPF needs to ensure the scheme’s pension shortfall is as small as possible.
In a statement, the PPF said: ‘‘We continue to work closely with the trustees of the Toys R Us pension scheme and externally appointed advisors given the current CVA proposals. We have yet to decide how the creditor rights will be exercised in the CVA vote. We are seeking to fully understand the current position of the company, including its future potential, position of the US parent and the reported historic financial transactions. The pension scheme is already underfunded and, if we were to vote in favour of the CVA, we would need actions taken that ensure the position of the pension scheme was not going to further weaken.
“The filing of CVA proposals means that an assessment period is automatically triggered for a pension scheme. Whatever the outcome of the CVA the pension scheme members can be reassured that they remain protected.”