Pensions: major concern for private equity industry

A survey by Punter Southall Transactions Services of private equity firms has revealed that defined benefit pensions continue to be a serious concern and ongoing challenge for private equity firms, whether making acquisitions or disposals and whilst managing portfolio companies.

The top pensions concern mentioned by over half of the private equity firms surveyed was the risk that changes in future life expectancy predictions will increase liabilities during ownership, resulting in a loss on exit. However, this concern isn’t unique to the private equity industry as uncertain future improvements in life expectancy is a worry for all pension scheme sponsors and trustees.

However, despite concerns about longevity, very few private equity firms are prepared to entertain the prospect of a pension scheme buyout at current market levels.  For many, there would need to be a significant fall in the price, with only 25% prepared to pay 120% or more of the FRS 17/IAS 19 measure - buyout tends to cost circa 130% to 150% of the FRS 17/IAS 19 measure. This corresponds with the views of Finance Directors at private equity-owned companies and indeed other organisations.

In a transaction situation, agreeing a settlement with the Trustees of the pension scheme was generally recognised as the most difficult step by the survey participants. More than 80% view agreeing a deal with the trustees as often being a significant hurdle.

When selling a business, over 40% of the private equity market expects other private equity houses to take on pension liabilities at a lower price than they did when acquiring those obligations. In other words, these private equity houses believe that they price for pension liabilities more cautiously than the rest of their industry and therefore effectively expect to make a profit on the pension scheme during ownership.

Richard Jones, Principal of Punter Southall Transaction Services comments:

"This latest survey confirms that concerns about pensions are still a significant challenge for most private equity companies. Whether it is overcoming hurdles such as agreeing a deal with trustees or fears about the risk of increasing life improvements costing them more than anticipated, seeking professional advice on transactions before and after an acquisition is more important than ever before."

The Market Value of Pensions Liabilities is a report carried out by Punter Southall Transaction Services, the transactions division of Punter Southall Group. The report surveyed 16 of the leading private equity firms in the UK to find out how the UK private equity market currently prices defined benefit pension liabilities and the significance of pension schemes in relation to making and disposing of acquisitions.

The report surveyed participants on a number of areas and additional noteworthy results of the survey included:

• Almost 90% of private equity firms surveyed continue to price pensions liabilities at the FRS 17/IAS 19 level or higher.
• Obtaining clearance from the Pensions Regulator was rather less problematic for most respondents than agreeing a deal with the Trustees.  However, it is worth noting that this is changing, with the Pensions Regulator increasing the "price" at which he is prepared to grant clearance.
• The (unpredictable) actions of the Trustees post completion were also a significant concern to most of our survey participants in making an acquisition, as were worries about further legislative burdens being placed upon them.
• Survey respondents were in general slightly less concerned with future investment risk, whilst future management and administration costs ranked the lowest of all the risks we asked our private equity contacts to rank.

The Market Value of Pensions Liabilities follows on from a report from Punter Southall Transaction Services in 2005 that examined how various market participants treat defined benefit pension liabilities when valuing a business. That report found that UK public equity markets tend to place too low a weight on pension liabilities as many share prices did not fully reflect the full value of the pension liability.

To obtain a full copy of the report please contact Chris Parlour or phone him on 020 7533 1815.

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For more information on Punter Southall, please contact:

Penrose Financial

Roman Townsend/Sarah Caddy/Andre Flemmings
020 7786 4875/4819/4811

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