Outlook: Grimsey deals new blow to final salary pensions

P&O/Carnival; Byers' Enronitis
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Few companies offer final salary pension arrangements to new employees these days, but actually to close an existing final salary scheme and transfer members on to money purchase arrangements, as the Iceland Group is proposing to do, is pretty much unprecedented among large, publicly quoted enterprises.

It is nonetheless easy to see why Bill Grimsey, Iceland's chief executive, wants to do it. He might have put it a little less cynically in his letter to members, which began with the ludicrously inappropriate mission statement "The Iceland Group – working towards a secure future for our shareholders and our colleagues". As we all know, a defined contribution pension scheme is a lot less secure than a defined benefit one, for employees if not shareholders. The 25 per cent of salary Iceland contributes to Mr Grimsey's pension arrangements also sits uncomfortably alongside what he wants trustees in the final salary scheme to agree to.

But the bottom line is that Iceland can no longer afford final salary pension benefits, even for the lowly 15 per cent of the workforce that is still entitled to them – the final salary scheme having been closed to new members five years ago.

Final salary schemes expose the employer to all the investment risk of pensions and guarantee a pension level relative to salary whatever happens to financial markets. Shortfalls have to be funded by the employer, so that when investment returns are weak, as they are at the moment, top-ups are required with growing frequency.

Companies are facing a double whammy effect, since the shortfalls are occurring at a time when profits are already under pressure. According to Mr Grimsey, the final salary pension scheme cost the company a quarter of its profits last year. A new accounting standard, FRS 17, which requires companies to assess pension fund liabilities by reference to low-yielding corporate bonds, and reflect the consequences on the balance sheet, is further exacerbating the problem.

Mr Grimsey's need is great, since Iceland's profits are under even more pressure than most, so brazenly he's rushing in where angels fear to tread. But if he's successful, others are bound to follow. Ernst & Young is about to do so by all accounts already. No wonder companies have grown to expect so little loyalty from their employees. Shareholder value is a demanding god, but there are downsides to the unremitting pursuit of short-term profit. Workforce promiscuity is one of them.


The choice facing P&O Princess shareholders becomes more complex and difficult by the week. Yesterday Micky Arison's Carnival upped the stakes again by raising its bid to 550p a share. Given that in the immediate aftermath of 11 September Mr Arison was offering only 180p, he's come quite a distance and, on value grounds alone, he's on the cusp of what shareholders might find acceptable. So is it goodbye Royal Caribbean, who's own merger proposal now looks poor value by comparison?

If only things were so simple. The P&O board continues to believe the Royal Caribbean alternative stands a better chance of steering a course through the shark-infested waters of competition regulators, a view that gained some support this week when the Office of Fair Trading published its reasons for referring the deal to the Competition Commission.

The OFT has chosen to define the cruise market as passenger cruise days based not on the port of exit but on where the tickets are sold. Using this method, the relative market shares for the P&O/Carnival combination look much higher in the UK, Europe and the US than they do for the Royal Caribbean alternative. Assuming, therefore, that the regulators march in step, the Royal Caribbean deal would seem to stand the better chance of success. As it happens, the fact that either combination involves reducing three dominant players to just two seems quite likely to incline regulators to block both, but that's a different issue.

In any case, the P&O board cannot recommend Carnival, or indeed make any encouraging noises to Carnival at all, without triggering the "no shop" clauses of its merger agreement with Royal Caribbean. If the clause is triggered, Royal Caribbean can sail off into the sunset taking the break fee, worth 6p a share, with it, and P&O might end up with no deal at all. What's more, the Carnival proposal is to all intents and purposes an all-share offer. The bulk of P&O's institutional shareholders cannot or will not hold foreign paper, so there is bound to be a big flow back problem.

Carnival has already got 20 per cent support for an adjournment motion at the forthcoming meeting to vote through the Royal Caribbean merger. But getting to the 50 per cent it will need at the meeting itself will be a stretch and, in any case, Royal Caribbean might still decide to walk away and take the legal costs on the chin, depriving shareholders of the two horse race they want to maintain. The controlling Wilhelmsen family has intimated that this is precisely what it will do.

Perhaps the most intriguing possibility is that Lord Sterling, P&O's chairman, might be forced into the difficult position of casting the deciding vote at the 14 February meeting. This would happen in the event of there being a substantial number of proxies undecided on the adjournment motion. Lord Sterling would then be required to cast them one way or the other in accordance with what he believes his fiduciary duty to shareholders to be. Either way, the P&O chairman faces a fraught week with the lawyers. It's one thing to call off the wedding, but to do it on St Valentine's day is quite another.

Byers' Enronitis

Ernst & Young were given the answer Stephen Byers wanted and have duly worked their way back to the question. Lo and behold, the public private partnership for the Tube will be cheaper than Ken and Kiley's plan for a public transport bond by more than £2bn.

It would be unfair to suggest E&Y has contracted Enronitis but the reality is that its conclusions about the competing models for funding the London Underground were never in doubt from the day the Secretary of State for Transport went out and hired a firm of accountants.

That said, E&Y has been smart enough to leave itself with some escape routes should the PPP turn into the same unholy and expensive mess that rail privatisation has proved. The very first page of its report admits that conducting value for money assessments is as much an art as a science. And it makes no bones about the degree of subjective analysis applied to its examination of the rival options.

E&Y is also careful to point out that the kind of financial experiment now planned with the Tube has never been carried out in a commercial environment anywhere else in the world before. Nevertheless, the conclusion is what matters and that says Ken and Kiley's model will cost the taxpayer nearly £18bn against a little over £15bn for the PPP. Never mind the fact virtually the entire difference is accounted for by some highly questionable assumptions about the efficiency advantages of the private over the public sector.

The big advantage of the PPP for the Government, of course, is off-balance sheet financing, since the upfront money comes from the private sector while the taxpayer picks up the tab later. If (when?) it all goes wrong, Mr Byers will have created his very own Enron. You can put money on him taking the fifth.