Pensions trustees fear private equity takeover

Nearly three quarters of pension trustees (72 per cent) would be concerned if their schemeís sponsoring employer were to be taken over by a private equity firm, according to new research released today by Aon Consulting, a leading pension, benefits and HR consulting firm.

Aon Consulting surveyed over 250 trustees of Defined Benefit (DB) schemes on how they felt about the prospect of a takeover by a private equity private equity firm, as well as whether they would consider PE as an investment opportunity.

Results showed that the prospect of being bought by a private equity firm raised fears with nearly three quarters (72 per cent) of trustees. This figure rose to almost 80 per cent of responses when the results were narrowed to trustees of schemes with a value in excess of 100million.

The main reasons given for such concern related to short-term funding concerns (around 30 per cent), followed by worries about a deterioration in the strength of the covenant (around 20 per cent) and concerns about potential lack of interest in the schemeís members (20 per cent). Trustees were also concerned simply by a fear of the unknown (15 per cent).

However, in contrast to trusteesí wariness of private equity acquisition, their attitude shifts positively when it comes to investing in privately owned companies as a means of diversification. Around a fifth (21 per cent) of trustees said that they have considered and implemented, or are currently considering, investment in PE. For schemes with a value over 100 million, where almost a third (31 per cent) say they are considering, or have already invested in PE.

The significant influence of pension trustees in the outcome of takeovers by private equity has come to light in the past year as the PE industry has flourished. In high profile deals such as the buyout of Alliance-Boots and Deltaís recent failed bid for Sainsburyís, the acquirerís need to win the backing of trustees was perceived to be critical to the outcome.

The survey results indicate that if private equity firms are to bid successfully for companies with DB schemes of significant size, then one of the key battles for such firms will be the need to gain the backing of trustees. In order to do this they must demonstrate commitment towards pension schemes and understanding of trustee priorities.

Commenting on the survey results, Paul McGlone, principal and senior actuary at Aon Consulting said:

ìThe survey shows that the private equity industry still has challenges to face to win the backing of trustees, who are not just concerned by its asset stripping reputation or fears over scheme funding, but also by the attitude to scheme members. Some trusteesí fears are very specific and well founded, such as the concern that gearing could move the scheme down the order of creditors. However other concerns are simply a fear of the unknown.

ìRecent large buyouts have raised the profile of trustees, who perform an essential role in protecting the interests of their schemeís members, and would-be private equity acquirers must engage with trustees to allay their fears at an early stage. However trustees must also recognise the potential benefits to the business that a new owner can bring, and must carefully assess the impact of any private equity acquisition on their sponsor and scheme on a case by case basis and decide how they might protect membersí interests in the event of takeover.î