Cluttons: tackling the £43m pensions shortfall head-on

Cluttons is wrestling with a £43m pensions shortfall, but is determined to tackle the issue head-on. James Gray and Steve Morgan tell David Hatcher global growth is a big part of the answer. Cluttons has a problem – a £42.9m problem. The advisory firm’s pensions liability has rocketed to this eye-watering figure over the past two years. This is because of low interest rates, determining that a larger shortfall has needed to be made up by the company, and longer life expectancy, meaning bigger pay-outs. [caption id="attachment_862805" align="alignright" width="400"] James Gray (left) and Steve Morgan. Portrait by Tom Campbell[/caption] It is a problem bedevilling UK plc and one that is casting a shadow over an otherwise encouraging global growth story at Cluttons. In the company’s accounts for the year to 31 March 2015 its auditors reported that there was “material uncertainty which may cast significant doubt” about the world’s oldest practising firm of chartered surveyors’ “ability to continue as a going concern”. Those accounts included a £19m actuarial loss as a result of a sudden increase in pension liabilities and resulted in a total comprehensive loss for the company of £18.9m. This year’s accounts no longer include that perilous classification, as liabilities levelled out and actually saw a modest decline of £1m. But the pensions scheme “continues to have a significant adverse impact” and “the deficit remains hugely significant in terms of the group and LLP’s balance sheet”. In order to tackle to the issue, “the firm continues to be in discussions with the trustees, the Pension Protection Fund and The Pensions Regulator as to alternatives for the pension scheme, including a negotiated settlement”. In a first interview together since their appointments, senior partner Steve Morgan and managing partner James Gray discuss prospective solutions to the pension issue, reveal why they feel the government has to intervene to help solve the country’s pensions crisis and how they plan to grow the business. Not unique Pensions problems are certainly not unique to Cluttons. In August a report by PwC showed that the UK’s 6,000 defined benefit pension funds had a total deficit of £710bn, having jumped by £100bn in a month owing to measly returns on gilts. Other companies and partnerships both outside of and within the property industry – some with famously generous final-salary pension schemes – are likely to come under pressure, too. The list of current high-profile pension scheme concerns includes BHS, Bernard Matthews, Tesco, John Lewis Partnership, BT and British Airways. Knight Frank’s results for the year to 31 March 2015 also included £16.5m of pension liabilities, though the company did generate a £127.4m profit. The irony of the situation is that, aside from the weighty monkey on its back, Cluttons is performing strongly and returned a £7.1m operating profit in its most recent financial year from £48.3m of revenue. The company has 600 employees, half of whom are in the UK. It is perhaps the leading property adviser in the Middle East and is starting to take advantage of the westward flow of cash out of the region. It is also making its first steps into Africa and is steadily expanding its facilities management arm. Cluttons has put in place new leadership this year. Morgan replaced Bill Siegle in April and Gray took on his new role in August – and both are leading the charge in expanding the business and tackling the pensions issue. The government has to do something, in terms of providing more flexibility for trustees of pension funds” “There are loads of businesses out there that have this looming issue but don’t deal with it. We tried to take a proactive view on it and do something about it,” says Morgan. “What are we going to do about this? What’s best for the business? What’s best for the pension fund trustees? Who are the best people in the market we can talk to?” The pension scheme in question closed to new members in 2006 but its liabilities are likely to carry on into the 2030s. Cluttons brought in Deloitte as its adviser to deal with the situation in October last year and began searching for solutions. One possible avenue was to undertake a corporate deal and the company discussed a possible takeover with Lambert Smith Hampton owner Countrywide. The pension scheme figured prominently in those discussions, but in the end no deal was reached after Cluttons partners decided not to pursue a tie-up. The firm’s ongoing talks with trustees includes the prospect of a settlement but currently the firm pays monthly contributions plus a “ghost partner” share of profits into the scheme under a recovery plan that was agreed in 2013 and covers the period until 2033. “In our conversations with the regulators and the Pension Protection Fund, we’re working very hard and engaging the best advisers we can to deal with it in the most appropriate way for the pensioners, the business and our clients,” says Gray. One way of dealing with the problem is through a pre-pack administration, as was pursued by Colliers International and other businesses before and since. It remains the most radical and clinical way of shedding a pensions liability. Could it happen with Cluttons? It appears the business is instead targeting a longer-term workout with its stakeholders. “There are plenty of different options, from discussions with trustees about how one deals with the liabilities, through to the ones that you’ve mentioned,” says Gray. “They all have their advantages and disadvantages but certainly there are discussions that we constantly have with trustees about doing the right thing. But what we have got to remember is that this isn’t about a short-term fix. There is always the danger of doing something knee-jerk and anarchic and not thinking about the slightly more medium to long term.” Trading profitably But trustees must be careful not to kill the golden goose. While Cluttons has been operating profitably and expanding over the past few years, if it is hamstrung by its pension scheme its ability to pay into it will be lessened. “If the deficit is such that it’s stopping you investing in the business and growing the business, it’s not the best thing for the pensions or the trustees. So there’s a fine balance,” says Morgan. If the deficit is such that it’s stopping you investing in the business and growing the business, it’s not the best thing for the pensions or the trustees” “You’ve obviously got the other side of the coin too, which is: ‘I’ve worked all my life for it, that’s the promise I was given, I’m owed it.’ There is no easy solution,” adds Gray. So widespread are pension liability issues across the UK, there is the prospect that the government may have to intervene in some way and it is certainly the view of Cluttons’ management that pension fund regulation should be loosened to help deal with the problem. “It’s clear that the government has to do something, in terms of providing more flexibility for trustees of pension funds on how they deal with their investments and how certain schemes are structured so that it gives the trustees the ability to change benefits that are defined under that scheme. UK plc does require the government to take action,” says Gray. Global reach Morgan is well aware that dealing with the pensions liability cannot be all-encompassing and he has a vision as to how he wants to develop the business. A man as accustomed to doing business in Baghdad as in Barbados, he leads the firm from Dubai but is regularly in the UK. Before he was appointed senior partner he was Middle East chief executive. [caption id="attachment_862803" align="aligncenter" width="1024"] Steve Morgan and James Gray hope Cluttons’ growing turnover and overseas strength will help deal with the pensions shortfall. Portrait by Tom Campbell[/caption] The company entered the Middle East in the mid-1970s, with its first office in Bahrain, and now has 220 fee earners across its Bahrain, Dubai, Sharjah, Abu Dhabi and Oman offices. Through a joint venture, it now also has a presence in Saudi Arabia. Cluttons currently generates 37.5% of its revenue from outside the UK and there is an ambition to grow that to 50%. Being a conduit for capital from the region to the UK, given the company’s presence in both markets, is a business opportunity Morgan is looking to exploit. The company has set up an international residential sales team based in London to sell schemes all over the world, with a presence in many countries through franchise and joint venture arrangements. Last month at the Cityscape conference in Dubai, the company was responsible for selling flats at a Taylor Wimpey development in London. “That’s the gold at the end of the rainbow that everybody’s chasing, whether it’s Far Eastern money or Middle Eastern money, to bring it in and to do the big sovereign wealth deals or with private investors,” he says. “Our Middle East businesses have been running as local offices. We have significant international presence and now it’s time to look at pulling that together, bringing the systems in to make sure that we are working properly and really generating that cross-selling and bring that income back into the UK.” Since 2012 Cluttons has also been expanding its global facilities management and corporate occupier offering, partly through alliances with other firms. It has a mandate to manage Nokia’s property in the Middle East and Far East and the business segment now generates around £8m annually for the business. That’s the gold at the end of the rainbow that everybody’s chasing, whether it’s Far Eastern money or Middle Eastern money, to bring it in and to do the big sovereign wealth deals or with private investors” “We have pulled together a global platform to offer the best possible solution to the client. So through a very clever IT system, there are a number of local service providers around the globe that work through one system into the client,” says Morgan. This initiative led Cluttons into Nigeria last year and the firm has begun to hold the hands of Middle Eastern firms looking to expand into Africa as it introduces international best practice into emerging markets. “We’ve got our licensed business in South Africa and satellite offices in various countries in North Africa. Cairo is back on the map for corporates, having been through the mill, and we can triangulate Africa with a presence in Kenya, South Africa, West Africa and North Africa,” Morgan says. Cluttons’ pensions liability is undoubtedly a strain for the management of the company but there is the opportunity to come to a settlement with the trustees and it appears some progress has already been made. That will allow the top team to focus on what really matters: delivering growth. According to Gray, other property advisory firms should take heed of Cluttons’ head-on approach. “We know there are others that are suffering,” he says. About Cluttons Oldest practising surveying firm in the world – established in 1765 by joint founder and first president of RICS John Clutton. 600 employees – including 300 in the UK and 220 in the Middle East. Serves clients in more than 50 countries globally, partly through joint venture and alliance agreements. Generated 37.5% of revenue from outside the UK in year to 31 March 2016 and 47% in the first quarter of 2016. • To send feedback, email david.hatcher@estatesgazette.com or tweet @hatcherdavid or @estatesgazette