Pension funds vs private equity - update

As I've mentioned before, company pension funds (and their deficits) are increasingly a stumbling block for the buyout bit of the private equity market. Today the Pensions Regulator has issued a reminder to trustees to negotiate hard with private equity firms if a buyout is on the table. Effectively the argument is that a leveraged buyout represents a weakening of the emploer covenant, and as such trustees should look for some commitments to the pension fund upfront

This is both right in principle, and useful in practice. If private equity is, as seems likely, going to play an increasingly important part on the economy then we have to ensure this doesn't come at the expense of good pensions. The FT's take on this is pretty sound. The Lombard bit is pasted below. I think it's spot in saying the main point of the Regulator's intervention is to make trustees of smaller schemes (who might otherwise be taken for a ride) aware of the issues.

Lombard comments:

The Pensions Regulator’s attempt to put steel in the backbone of pension trustees is welcome, although it is likely to raise a groan from buy-out firms, which already have a tough time making leveraged public-to-private deals stick in the UK.

It may look as though the regulator is stating the obvious. In recent cases, including the acquisition of Corus, the steel company, by India’s Tata Steel and the abortive buy-out of J Sainsbury, the retailer, by a private equity consortium, trustees did press for higher contributions and improved status in the hierarchy of creditors. They recognised that a change in ownership – and an increase in leverage – could increase the strain on employer covenants.

Kohlberg Kravis Roberts, winner in the battle to buy Alliance Boots, is still negotiating with the target’s trustees. The firm may yet have to stump up a higher pension contribution, even though Richard Baker, Alliance Boots’ chief executive, insisted yesterday that the schemes were “well-funded”.

The regulator is also hoping his message will reach smaller companies, where trustees are sleepier and takeovers happen away from the white heat of publicity. They deserve all the support they can get.

Yet even in high-profile cases, bidders have shown a surprising nonchalance about the challenge posed to their bid arithmetic by pensions. In part, that reflects the inadequacy of accounting standards that mask the potential liabilities of pension funds. It is not only trustees who need to stay awake.