News

The dangers of private equity buyouts for employee pensions are notorious. UNI has pointed to two types of risk.



First, private equity takeovers often saddle companies with a large amount of debt, increasing the risk that a company may collapse, along with its pension scheme. Second, in order to cut costs, new PE owners may replace an existing company scheme with a less favourable one. That usually means abandoning a final salary, defined benefit scheme, under which pensioners are guaranteed a specified monthly income.



The UK’s GMB union estimates that private equity activity has so far led to the collapse of 96 pension funds, reports the Scotland on Sunday newspaper. Private equity is calling on pension funds to increase their investment in the business, while unions are warning trustees not to seek uncertain higher returns for their funds at the risk of jeopardising the existence of other pension schemes.



An upcoming UNI report will provide advice to pension fund trustees on how to respond to PE firms’ requests for capital. Covering over 100 pension funds in Europe, Japan, Australia and South Africa, the research commissioned that the level of investment by those funds in private equity tends to be markedly less than the US. The research confirms that many of those pension funds have union trustees and they are seeking guidance when investment decisions arise.



In a new development, pension schemes are increasingly being directly targeted by specific buyouts, not just affected as a result of whole-company buyouts. And this growing “pension buyout market”, as it is called in the financial press, is worrying pension trustees and regulators.



In the UK, the government is looking at ways to address concerns that the buyout market is treating pensions “as just another commodity” (IPE.com, 28 Feb ’08).



A company pension scheme may be bought directly, usually by a specialised insurance company. Or a firm may buy the whole company, with the intention of keeping its pension scheme while quickly selling on the rest of the company.



A recent survey in the UK concluded that nearly 3/4 of pension trustees would be concerned if their sponsoring employer were to be taken over by a private equity firm.



An example of a direct pension buyout is Goldman Sachs’s recent acquisition of the pension assets and liabilities of the Rank Group, the UK’s second largest casino and bingo company. According to Financial News Online US (29 Feb ’08), it was the US investment bank’s first foray into the market, carried out through its wholly owned insurance company Rothesay Life.



The UK controversy surrounding pension buyouts has been heightened by a transaction of the second type. In September last year, Pension Corporation made an offer to buy Telent, an electronics company owned since 2006 by the Ericsson Group.



It was widely expected that Pension Corporation, which is run by a hedge fund manager, would re-sell Telent but keep its pension scheme, according to the Financial Times newspaper. The pension fund’s trustees expressed concern about “serious implications” for the scheme’s 60,000 members. In particular, they feared that Pension Corporation’s first move would be to replace them as trustees, like it had done in another takeover.



The UK’s Pensions Regulator responded to an appeal from the trustees by appointing three independent trustees to the Telent pension scheme, and confirmed that decision in November.



The UK government referred to this case when in February it tabled a legislative amendment, agreed by all parties, to allow The Pensions Regulator to appoint independent trustees when it is “reasonable” instead of having to wait until it is “necessary” (IPE.com, 21 Feb ’08). The Minister said the buyout market “needs to be watched with a great deal of care”, and later added that he was willing to further strengthen the TPR’s powers to protect people’s pensions (IPE.com, 28 Feb ’08).