The importance of pension schemes in private equity deals involving U.K. companies has risen in recent months as economic problems have hurt pensions funded status and made valuing companies cash flows more difficult
This has been a factor for some time, but (it is) probably intensifying with the difficulty of arranging buyouts of the pension liabilities, and the increased deficits brought about by the market fall, said Kevin J. Pakenham, London-based managing director at Jefferies Putnam Lovell.
In private equity deals, trustee concerns usually center on a change in the creditworthiness of the company, since well-rated corporate sponsors tend to be replaced by debt-loaded entities set up by the private equity firms.
Those concerns were behind two failed 2007 takeover bids for London-based grocer J Sainsbury PLC the first by a consortium of private equity firms, the second by a fund owned by the Qatar Investment Authority.
Experts say longevity risk and other pension issues related to funded status are of major importance in the highly regulated U.K., where pension trustees have halted private equity deals they felt would weaken their ability to keep the plan well funded and where the U.K. government can require contributions by the acquirer.
In a recent survey of U.K. private equity managers by Punter Southall Transaction Services, London, longevity risk or more specifically the risk that mortality assumptions for calculating pension liabilities might change between the time a manager buys and sells a company led the list of risk concerns. Respondents were more concerned with longevity risk than future regulatory/legislative changes or future investment risk.
Chris Parlour, senior consultant at Punter Southall Transaction Services and a co-author of the report, said he wasnt surprised by concerns about longevity risk. Weve talked a lot about it in the past three or four years, he said. It affects every (companys) pension scheme.