More companies could shed their pension obligations through buyouts, according to Watson Wyatt.
The consultancy says a sale frees a business of its pension fund liabilities at a lower cost than a fully authorised insurance company would require. This allows a company to offload its liabilities while the buyer makes a profit on an established fund.
Watson Wyatt highlights Citigroup’s £200m acquisition of the Thomson Regional Newspaper pension fund earlier this month as the start of a trend. Citigroup became the first bank to buyout an external pension fund in the acquisition.
The Citigroup acquisition follows the sale of 75% of Threshers two weeks after a consortium led by Duke Street Capital founder Edmund Truell bought the off-licence from private equity firm Terra Firma. Truell retains the pension fund and the remaining 25% share.
Andrew Reid, head of corporate consulting at Watson Wyatt, says: “The main stumbling block in the past has been price. If getting liabilities off the balance sheet can be made a bit cheaper than buy-out, with the new sponsor having a top-notch covenant that keeps trustees happy, then we wouldn't be surprised to see quite a few trades."
He says the buyer must put all of their covenant at risk to finance the pension scheme.
He says: “This is very different to the early abandonment proposals that were suggested by some of the new participants in the buy-out market, and shows the impact of the Pensions Regulator's warning that abandonment without access to additional capital was unlikely to be in members' best interests."
He says the potential damage caused by institutions using their covenant to support the transactions is huge.
He says: “It will be fascinating to see how much market capacity there is for this sort of activity.
“The quoting activity was all around full buyout of all liabilities, evolving to bids for buyout of a specific group, such as pensioners.
"There are a number of steps that can be taken to reduce the cost of either an insured or non-insured buyout and we are seeing a very high level of interest from clients in doing this, either as an exercise on its own terms or as a part of an integrated buyout project.”
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