Saturday, 24 March 2007

Pension fund vs private equity

There's a good bit in today's Grauniad about the tussle between the trustees of the Sainsbury's pension fund and the private equity consortium that wants to make a bid for the company. The trustees have, rightfully, said that a change in ownership would change their perspective. In addition they have apparently told the consortium that they should come first on the list of lenders in the (hopefully unlikely) event of insolvency.

In all of this I think the trustees are doing exactly the right thing by the scheme and its members. This is just the sort of approach that the Pensions Regulator has been telling trustees they ought to take. However I wouldn't be surprised to see them take a bit of flak from commentators in the business press and/or from the pensions industry.

When cases like this were talked about in theoretical terms when the Regulator first started spelling out how trustees ought to act it was notable that there was (anonymous) criticism from the investment banking mob. This will put a damper on companies' M&A activity they said. (Of course their stance on this issue was entirely neutral and not at all influenced by their direct stake in M&A work.) So that argument might resurface. In addition the trustees might be attacked for being too risk averse.

There are a couple of things worth remembering here. First is that the scheme deficit is effectively a debt owed by the employer to the scheme. As such the trustees are absolutely right to try and get upfront committments from the new 'owners' of that debt, and to do some background checks on the business plan etc. A bank would do exactly the same thing.

Secondly, the deficit might be an irritating figure on a balance sheet for the PE consortium, but for the trustees it represents real people's pension entitlements. There is a perfectly reasonable case to be made that it is more important that promises to beneficiaries are kept than that the ownership of the company changes, or, more widely, that M&A activity take place. I am frequently struck by the way people in the City only seem to be able to see pension funds as a drag on the system (despite the fact that they make quite a lot of money from the assets involved). Who do they think capitalism is for?

Finally, if the unions are smart what they should be doing is getting their member-nominated trustees (MNTs) from the likes of WH Smiths, M&S and Sainsbury's to talk to union MNTs on other funds. They ought to give MNTs guidance on what to do in the event of a bid. Trustees in this situation should hold out for the best deal possible. How the bidder responds will tell them a lot about how they would act as owners of the company. If the bidder walks away the trustees - and the company - may have had a lucky escape.

1 comment:

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