Private equity muscles into U.K.'s booming pension risk transfer market

Private equity and credit firms have elbowed their way into everything from real estate to corporate lending. Now they're cracking open Britain's growing pension risk transfer market.

A partner of U.S. buyout giant TPG and Disruptive Capital Finance, owned by the Truell family office, are backing so-called superfunds that are poised to enter the business of taking over costly pension funds from companies struggling to keep them going. Insurers, which dominate the market, are expected to do more than £30 billion ($38.7 billion) of transfer deals this year, according to consultants Lane Clark & Peacock.

Investors desperate for yield in the world of negative interest rates are increasingly turning to private equity firms in search of returns, which has fueled the private equity industry's expansion beyond the leveraged buyout deals that remain their stock in trade. In the U.K., superfunds are awaiting approval of their debut deals from a regulator that's pushing for consolidation.

U.K. companies have spent the last few decades trying to rein in pension costs, which have soared as employees live longer, regulation tightens and returns on traditional investments such as bonds decline. This applies particularly to direct-benefit programs that promise employees regular payments or a lump-sum payoff when they retire. While few firms offer these plans any longer, they have to shoulder the cost as long as existing pension obligations remain on their books.

In the current market, companies can buy so-called bulk annuity policies from insurance companies such as Legal & General Group and Rothesay Life. Under these policies, insurers acquire the pension fund's assets as well as the obligation to make pension payments to its members. These so-called buyout deals are costly, however. Walmart Inc. will incur a pretax charge to earnings of about $2.2 billion as part of its plan to offload a retirement plan for employees of its British subsidiary Asda to Rothesay Life.

Private equity firms have a piece of this action through their investment in insurers such as Rothesay Life, which counts Blackstone Group and Singapore's sovereign wealth fund, GIC, among its backers. Now they've set their sights on the struggling pension funds that can't afford insurance.

That's where the superfunds come in. They argue that because they don't face the costly capital requirements imposed on insurers, they can consolidate and manage pension plans at lower cost and generate better returns. The U.K. government supports the emergence of superfunds, which it says could improve funding for many pension programs as well as their investing power and governance.

"There is huge scope for consolidation," said Adam Saron, founder of Clara-Pensions Ltd., a consolidator backed by private credit investor TPG Sixth Street Partners. The firm's first deal, a transfer involving less than £100 million of assets, should receive the regulator's blessing early next year, and more are in the pipeline, he said.

The Pension SuperFund, backed by Disruptive Capital, expects clearance of its first deal as soon as this month, and several billion pounds of potential transfers are in the works, according to Managing Director Antony Barker.

Hedge fund firm Christofferson Robb & Co. has also expressed interest in starting a superfund. A spokesman for the firm didn't respond to emails requesting comment.

Edmund Truell, a founder of Disruptive Capital, said the regulator's support for superfunds is a key part of their appeal to investors. He makes the case that firms like his have the investing chops and financial backing to turn things around for the "vast majority" of ailing pension funds that may never be able to afford insurance and are too small to save themselves.

The U.K. government's support isn't unequivocal, however. It also warns of "clear risks" in allowing superfunds to set up shop without new regulations to protect retirees, and has proposed measures to prevent these companies from undermining insurers by doing transfer deals with pension funds that can afford a buyout. The government issued its proposal nearly a year ago, but hasn't yet presented draft legislation to Parliament.