The Pension Corporation (PC), founded by the former Duke Street Capital boss Edmund Truell, has till the end of this month to decide whether tough intervention from the Pensions Regulator is a deal breaker in its plan to buy telecoms firm Telent for its £2.5bn pension assets.
It is the first time since it came into being in April 2005 that the regulator has used its special powers to intervene in a corporate takeover, sending a stark warning to the growing number of predatory firms circling UK pension assets.
The unprecedented step was taken on 19 October, when the watchdog hurriedly installed three independent trustees on the board of the £2.5bn Telent pension scheme.
Telent is the rump of the collapsed UK group Marconi. Today it is a small operating company selling telecoms equipment and services with a large pension fund. The regulator's decision was taken after the trustees of the original scheme raised concerns over the pension benefits of its 62,000 members in the wake of a £400m takeover bid by PC, a Guernsey-based retirement fund consolidator. PC creates special vehicles to bid for companies with big pension funds, in the hope of seizing control and running them more efficiently.
PC recently acquired the off-licence chain Thresher and Thorn, the TV rental company. After buying the operating companies and the pension schemes, it quickly sold on the bulk of the trading companies. Critics warn that these new-wave pension businesses are predatory and not necessarily in fund members' best interests.
At the same time, the Pensions Regulator has highlighted the danger of pensions "abandonment", when an employer attempts to sever its commitment to the retirement fund. "Our position remains that in most circumstances, the best means of delivering members' benefits is for the scheme to have the continued support of a viable employer," the regulator said in a statement earlier this year.
Following the regulator's intervention at Telent, the takeover is in limbo. The three new trustees will be in charge of decision-making at the fund for the next six months, preventing PC from taking control of the pension assets. Although Mr Truell has been granted a week's extension to the original offer date – taking it to 31 October – PC has indicated it may now let the deal lapse.
Despite what has happened at Telent, all the signs suggest the "secondary pensions market" – where existing schemes are sold on – is set to grow rapidly. Earlier this year, the US investment bank Citigroup was given clearance by the Federal Reserve to buy the closed pension fund of Thomson Regional Newspapers. Citigroup is now vying with insurance companies and private equity firms to take the final salary company pensions of British firms and manage them for a price. A handful of other top-tier investment banks are rumoured to be considering similar moves, and with many firms seeking ways to remove pensions debt from their balance sheets, advances made by this new wave of consolidators could be increasingly welcomed by corporate boards.
But Andrew Reid, head of corporate consulting at Watson Wyatt, warns: "While firms want to get pensions liability off balance sheet, there is a big disconnect when they are asked what they might be willing to pay."
Only the richest companies can afford an insurance buyout of their pension scheme, where assets and liabilities are transferred to an insurer. For trustees this is the ideal solution, leaving the fund with strong, heavily regulated capital backing and reserves. But for most companies it is prohibitively expensive. For this reason the likes of PC have stepped forward to offer a so-called "non-insurance buyout" as a cheaper option.
Demand for clever solutions to the problem of occupational pension liabilities is sure to increase in the future. Mr Reid anticipates a time when the secondary market becomes highly liquid and pensions buyouts change hands more than once.
"The run-on of these funds can take decades," he says. "We have already seen it in the insurance market with books of annuities being bid for by several interested parties. It is possible that eventually the non-insurance pensions market will become equally liquid."
All the signs suggest that trustees of corporate pension funds will have to be more vigilant than ever before, and that the regulator – currently in its infancy – will have to grow up quickly if it is to succeed in its role of safeguarding the country's valuable workplace retirement funds.Reuse content