Toys R Us has tabled a compromise deal that would wipe out its pension deficit within a decade in an eleventh-hour attempt to stave off a collapse threatening 3,200 jobs.
Sky News has learnt that the company, which is the UK’s biggest toy retailer, made the proposal at a meeting with the Pension Protection Fund (PPF) on Tuesday.
The offer, which would reduce Toys R Us’s deficit recovery plan from 15 years to ten years, also includes an injection of a sum greater than a planned payment of £1.6m into its pension scheme in January and March.
It falls short of the PPF’s demand for a £9m up-front contribution to the scheme – which would be equivalent to three years of company payments and associated levies.
Toys R Us needs the PPF’s support at a vote of creditors on Thursday for a restructuring that would involve the closure of a quarter of its stores, and lower rent bills at many others.
The pensions lifeboat has said that it intends to vote against the plan because it does not offer adequate support for the toy retailer’s retirement scheme.
Image: A quarter of Toys R Us stores in the UK will close next year under the CVA plan
Without the PPF’s backing, the so-called Company Voluntary Arrangement (CVA) will fail, with Alvarez & Marsal on stand-by to handle a pre-Christmas administration.
One source indicated that the additional contributions offered by Toys R Us over the next three months would be marginally superior to the likely returns to the PPF if it were to fall into administration.
Talks between Toys R Us and the PPF were continuing on Wednesday morning in an effort to hammer out a deal to secure the pension body’s backing.
The creditor vote takes place on Thursday morning in London.
The crisis follows Sky News’ revelation that the PPF would not support the CVA without the £9m pension fund injection.
Malcolm Weir, the PPF’s director of restructuring and insolvency, confirmed on Tuesday that the PPF had signalled its opposition to the CVA but kept alive the possibility of a U-turn.
Toys R Us UK’s pension scheme has a PPF deficit of £30m, referring to the sum that would be required to bring the level of benefits up to those which would also be payable by the PPF.
On a full buyout basis, the deficit is £93m, according to a letter from Alan Rubenstein, the PPF’s chief executive, to Frank Field, the Labour MP who chairs the Work and Pensions Select Committee.
Mr Rubenstein said the PPF was “happy to consider further proposals”, with sources saying his letter was sent before Toys R Us tabled its compromise deal.
“We would hope that there is no hasty entry of the company into administration or liquidation if the CVA proposals are rejected – the company made clear that they believed that the CVA would mean ‘no disruption for customers shopping through the Christmas and New Year period’,” he wrote.
At least 500 jobs would face the axe if the CVA is voted through, but a failure to do so would cast doubt on the future of the remaining 2,700 staff at the company.
Sources said that there was no prospect of a sum as large as £9m sum being injected into the scheme while Toys R Us’s US parent was in formal bankruptcy protection proceedings.
One insider said the PPF was seeking to elevate itself above every other Toys R Us creditor, despite the fact that it was landlords – rather than the pension scheme – facing financial pain as a result of the CVA.
In a letter to Mr Field published on Monday, the trustees insisted that the CVA would “not compromise the scheme” and said the loan write-off “had no impact on the direct covenant provided to the scheme”.
Video: MP backs PPF in Toys R Us ‘game of poker’
The veteran MP expressed alarm, however, saying: “As with BHS, the trustees and pensions regulator were kept entirely in the dark.
“The pension scheme is, at best, an inconvenient afterthought to self-interested corporate restructure.”
Under the CVA plan, the affected Toys R Us shops will remain trading throughout the Christmas period and well into the new year, but will begin closing from next spring.
The chain’s larger out-of-town stores will be disproportionately affected by the closure plan, owing to their weak performance amid a fast-changing outlook for the high street.
Retailers including BHS, Focus DIY and JJB Sports have previously used CVAs to exit loss-making stores, although all three companies ultimately succumbed to the fast-changing retail environment.
That track record has caused alarm among PPF executives evaluating the Toys R Us proposals.
The effort to overhaul its UK estate follows the filing by Toys ‘R’ Us’s American parent for Chapter 11 bankruptcy protection in September.
That move has sparked controversy over the company’s move to pay up to $21m in bonuses to top executives, which it claims is necessary to motivate them during the critical Christmas trading season.
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There has also been controversy over payments to UK executives and the write-off of a big loan owed to the UK company.
Toys R Us declined to comment, while the PPF could not be reached.