The Coats Group has made “significant" progress in relation to the de-risking of its defined benefit UK pension scheme, its half-year report has revealed, with a new on/off trigger mechanism agreed with the trustee set to potentially increase free cash flows.

The group previously agreed to make future contributions of £22m per annum up until 2028, after the 2021 valuation revealed a £193m deficit.

However, updates since then showed that the funding deficit has fallen significantly and is now approaching fully funded on a technical provisions basis with an estimated deficit of £25m (being 99 per cent of the technical deficit valuation).

In addition to this, the report showed that, as at 30 June 2023, the Coats UK Pension Scheme had a surplus on an IAS 19 basis of $151.9m.

This improvement was attributed to employer contributions, favourable movements in the market (increasing discount rates) and the de-risking actions that the group and the trustees have taken, such as a recent £350m buy-in with Aviva.

As a result of this significantly improved funding position in early 2023, the group and trustees agreed a new mechanism to switch off / switch on the regular cash contributions to the scheme based on monthly estimates of the latest funding position.

As such, if the scheme remains in surplus for two consecutive months cash contributions will cease entirely until any trigger on the downside, such as a return to deficit, has been hit, at which point contributions on a pre-agreed basis would resume.

Although the agreement was initially based on a funding range of 99-101 per cent for the on/off triggers, updates to reflect the latest views on mortality assumptions reduced the funding range for the on/off triggers to 98-100 per cent, further increasing the chances of the off trigger being reached in the near future.

Coats Group suggested that this has the potential to significantly reduce or eliminate the existing levels of contributions made into the scheme, and thereby increase free cash flows generated by the group within the short to medium term.

The group stated: “We continue to maintain strong and collaborative relations with the scheme trustees around strategic planning and have established a joint working group between the company and trustees to review further opportunities for de-risking the scheme, beyond the significant positive progress that has already taken place."

Commenting on the results more broadly, Coats group chief executive, Rajiv Sharma, stated: "Coats' trading performance in the first half of 2023 was against a strong prior year comparator and the backdrop of widespread industry destocking.

“We have continued to make significant progress on our strategic objective of making Coats a stronger, fitter and more focused Group.

“Our leadership position in industrial threads and footwear components, when combined with our investment in innovation and sustainably-sourced and manufactured products, positions us well to grow our revenue and margin and deliver ongoing strong cash generation in line with our strategy."

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