David Blackman explores how the EMI scheme was rescued from the brink of entry to the Pension Protection Fund

Just over two years ago, the EMI group pension scheme stood on the brink of entering the Pension Protection Fund. The fund’s sponsor company was threatened with bankruptcy following the messy unwinding of a highly leveraged buy-out.


However last month, in a dramatic turnaround, the scheme revealed the conclusion of a record £1.5bn de-risking deal with Pension Insurance Corporation.

How did the EMI scheme snatch buyout from the jaws of the PPF? The saga began in 2007 when private equity company Terra Firma bought EMI in one of the most celebrated deals of the mid-2000s private equity boom. However, the timing of the deal, which had been backed by the Citigroup bank, turned out to be poor.

They did a deal right at the peak of the market that was highly leveraged

“They did a deal right at the peak of the market that was highly leveraged,” says the scheme’s chairman Clive Gilchrist. The problem for Citi was that before they were able to syndicate its loans, as was common practice in private equity deals at the time, the markets had shut down, leaving the bank holding expensive debt.

The problem for EMI’s scheme meanwhile was that like many other defined benefits funds it was “seriously underfunded”, according to Gilchrist, who is also a director of BESTrustees.

The trustees could not even reach agreement with Terra Firma on the scheme’s 2005 and 2008 actuarial valuations, which didn’t end up being signed until 2011, according to Gilchrist. The delay triggered an intervention by The Pensions Regulator, after which Gilchrist was appointed chair.


As is so often the case, the crux problem was that private equity ownership and pensions don’t mix, Gilchrist says.

“They are trying to get 20% return for their private equity shareholders. They want to put as little money in as late as possible: otherwise it affects their internal rate-of-return calculations.”

The scheme’s problems intensified in February 2011 when Citi seized EMI, which was fighting seismic shifts in its music marketplace, after the company went into pre-pack administration. Citi was keen to dispose of the record giant but could not do so with a hefty set of pension liabilities in tow.

We reached agreement with Citi to facilitate the sale of the company

“The buyers, unsurprisingly, didn’t want the pension liabilities,” says Gilchrist. “They would have had to reduce the price of the trading company in order to persuade people to take them.” In order to pave the way for the deal, Citi struck an agreement with the pension scheme trustees. “We reached agreement with Citi to facilitate the sale of the company, as part of which they would inject a sum of £240m into the pension scheme and agree to buy it out within five years,” says Gilchrist.

During the same year, the fund closed to future accrual. The cash injection broadly funded the scheme in line with its ongoing technical provisions. A new sponsor company – EMI Pension Sponsor Ltd – was created until a buyout could be engineered. Within months of the deal, market conditions had improved to the extent that Citi decided late last year to accelerate the buyout schedule.


Gilchrist says: “Through their trading desks they have a very close view of what’s going on in the bond markets. It helped that they are market participants and so were really on top of what was going on. If it was an engineering company it would be very different.” The scheme was well placed for buyout in terms of its asset allocation, says Gilchrist.

“In the knowledge of where we were going, we were very cautiously invested in gilts and bonds, with bits and pieces of growth assets that we subsequently got rid of.”

Of the scheme’s £1.2bn assets as of March 2012, £824.1m were invested in bonds and just £34.2m in equities, with the bulk of the remainder (£334m) in pooled vehicles. Mercer UK bulk pensions insurance leader David Ellis, who advised Citi on the deal, says his team began work at the end of last year.

By the end of February, a shortlist of bidders had been assembled. In July the record-breaking deal was transacted. “Everyone worked very hard. It was a very tight time frame and it was set aggressively,” says Gilchrist. He singles out the scheme’s main asset manager, Insight Investments and the fund’s secretary Jay Solanki at Premier Pensions for working particularly hard to make the deal work. He adds it helped that there was the paucity of big deals in the pipeline when they went out to market.

We’d have been very upset if somebody had done a deal slightly ahead of us

“We had first-mover advantage that we didn’t want to lose. We found several of the insurers were interested and part of that was the kudos involved in doing a big deal.”

He jokes: “We’d have been very upset if somebody had done a deal slightly ahead of us, because there would have been less demand from the insurers.”

The size of the deal, which comfortably outstrips £1.1bn T&N buyout in 2011, has inevitably sparked comment. Much of this has centred on speculation that the recent significant rise in gilt yields and improvements in equity markets tipped the EMI Pension Fund into a position where buyout was feasible.


However, Gilchrist says that wider market movements were not the key factor driving the transaction but the determination of Citi to shift the pension liabilities off its books. “It was more a case of liquidity in the market and eagerness on their part. If somebody wants to says we are brilliant in terms of our market timing that’s fine by me, but it’s not true.”

Where’s there’s a will, there’s a way

Mercer’s Ellis agrees: “We decided that we wanted to make it work regardless of market timing. Where’s there’s a will, there’s a way.”

What the deal demonstrates however, according to Gilchrist, is that appetite exists amongst UK insurers for mass bulk annuity deals.

“There will be a little bit of indigestion in the short term because it will need to be assimilated, but this should encourage people that if they’ve got a £2bn scheme it’s worth going to insurers to ask the question.” Ellis agrees: “A lot of people in the market wondered if a deal this big could be done, or would be done, specifically in the buyout space.

“This showed that it can, and that there’s a genuine interest in writing this size of business. If you look at how the insurers are building up their operations, it’s clear that the market will expand at some point.”

We’ve moved it from that position of intense vulnerability

For Gilchrist, though, what matters is that he has secured his members’ benefits. “We’ve moved it from that position of intense vulnerability to where insurance policies are in place, that means members can sleep at night knowing they will get their pension.”

“My only concern – and they got fed up with me repeating it – was that I want to make sure that every pensioner gets paid in full and on time: that’s what trusteeship is all about and that’s what we’ve achieved.”

EMI fact file