What impact has the Pensions Regulators office had on private equity transactions since it was introduced in 2005 and was this a driving force in setting up Pension Corporation?
The UK Pensions Act of 2004 and the subsequent creation of the Pensions Regulator in 2005 led to the pension insurance market opening up significantly. In formalising procedures for dealing with pension funds, the Pensions Regulator has encouraged corporate schemes to investigate pension insurance as a way of minimising the risks associated with them. It was against the backdrop of these market developments that we decided to launch Pension Corporation. The creation of the Regulator has given Trustees more confidence to voice objections to takeover offers, and although the Regulator has so far taken a softly softly approach, failed deals such as M&S and WH Smith, and latterly the Sainsbury’s and Boots situations have clearly demonstrated Trustees’ increasing power. It is now more important than ever before that private equity bidders have a clear strategy for the pension scheme, and are equipped to engage with Trustees from the outset.
Can you explain your rationale for setting up Pension Corporation and how did your time at Duke Street Capital and previous experience shape what you are doing at the Pension Corporation today?
We set up Pension Corporation to take advantage of the new pension regime that emerged in 2005 with the creation of the Pensions Regulator and Pensions Act of the previous year. The Pensions Act enshrined in law the need for pension funds to be well funded, and, as a backstop, passed over to an insurance company on a buyout basis. In addition, the Regulator was given powers to require the immediate or ongoing funding of pension plans that are believed to be at risk. As we anticipated, the market opened up significantly with a corresponding increase in demand for pension insurance – we have already provided quotations for schemes totalling £50bn, with an average size of £2.5bn.
My time at Duke Street and experience over the last 20 years in acquiring and transforming corporate assets has allowed us to develop an innovative route to market that sets us apart from our competitors. We have the confidence to acquire corporate assets with attractive pension assets, secure in the knowledge that we can apply both our business transformation skills and our pension management skills for the benefit of all stakeholders. We don’t believe that there is any other player in the market able to deliver on both sides of the equation.
We have been able to hedge all the risks in our debt business, taking advantage of economies of scale and thereby building up to be the largest leveraged loan investor in Europe. We very much see our business to be a farming business (rather than a hunting business) and therefore see our returns as a long-term business plan.
Can you explain the structure of the business?
Pension Corporation is an umbrella brand for our three subsidiary vehicles which facilitate two main routes to pension assets, notably through Pension Insurance Corporation, which insures pension schemes directly, either insuring them fully or partially; and Pension Corporation, which acquires corporate assets with attractive pension schemes. Our third subsidiary, Pension Security Insurance Corporation, is a fully authorised Guernsey reinsurer that provides longevity reinsurance, as well as being able to reinsure specific risks for pension funds and pension sponsors. Our investors comprise blue chip financial institutions such as Swiss Re, RBS, HBOS, ABN AMRO and JC Flowers. Pension Corporation already has £1bn of capital invested in it and also has the ability to draw on further significant investor capital.
What is your due diligence process when looking to acquire pension assets?
As with any investment, we undertake a thorough due diligence process, including detailed talks with trustees and board executives. One of the advantages of our business is that we are able to operate in deal time, not pension time, leading to a faster and more efficient solution. We are also ready to take on the regulatory risks involved in such a transaction.
What are the main challenges in doing these types of deals and how long do you envisage holding such assets?
We currently have two main assets, Threshers and Thorn. Each had its own challenges but in short Threshers had a significant shortfall, which has now been turned into a significant surplus while Thorn has been moved further into surplus through improved asset allocation and investment management. Our intention is to hold pension assets through the full term of their obligations. In the case of Thorn, we sold on the Brighthouse operating assets. However, they also held Quadriga operating assets, which we have invested more money in through one of our investors (and hence moved it off our balance sheet) allowing them to expand their business. With Threshers, we retained 25% of the operating assets, and sold on the remainder to Vision Capital.
What, in your view, are the main challenges of doing business in this sector?
This isn’t a new market, as quite a number of FTSE 250 companies have already insured away some of the risk associated with their pension responsibilities. The focus that has been brought to bear particularly by the Pension Regulator but also, for example, by the increasing numbers of leveraged buyouts, is relatively new. Pension Corporation has already completed some of the biggest corporate deals in the sector and there are some challenges there in terms of communicating well with all the stakeholders. In addition, there are some challenges in developing products that will be attractive to trustees, management and their advisers, given the lengthy time frames in which pension decisions are generally taken, both in terms of pricing, and segmenting and insuring away different strips of pension risk. Our view is that the larger end of the pension transfer market, £1bn plus, will take time to develop but that businesses such as Pension Corporation with its market-beating capital backing and the pooled skills gathered under our roof will be in the vanguard of the developing market, and that market will develop more rapidly with time.
What are the legal and regulatory obstacles you have come across dealing in this business? And what are your views on the UK Pensions Regulator and what it has achieved or not in relation to the private equity industry in the last two years since it has been set up?
The obstacles are the same that would face any insurer or participant in the pension management arena. We are very comfortable with regulation on both sides and we have a good working relationship with the Pensions Regulator. His office does a great job and takes sensible decisions quickly, which is what the private equity industry needs. We believe in ongoing communication with the Regulator to ensure that they are informed of what we are doing on a regular basis.
In my view, one of the most important factors is to increase transparency in reporting standards. It is extremely important that it is clear what assumptions are being used and that timeliness in reporting is also improved.