The trustees of the
This news comes merely a month after a consortium of
It is not just the J. Sainsbury deal that was killed by pension top-ups, in June 2004 the £940m offer for UK stationer
On the same day that Boots letter was sent out, the Pension Regulator, a branch of the UK Government came out in support of UK pension trustees, by issuing a highly significant “clearance reminder” for those considering corporate transactions where there is an underfunded defined benefit pension scheme. This reminder foreshadows the permanent changes in policy that will come into effect in July 2007. It justifies Boots and J. Sainsbury’s requests for additional funding for healthy pensions by saying “trustees in these circumstances should consider seeking materially enhanced mitigation such as additional contributions to the scheme or rights over assets in excess of FRS17/IAS19 – the accounting levels that were considered acceptable under 2005 guidance. And corporate transactions, particularly highly leveraged buyouts or where the removal of assets will result in a significant weakening of employer covenants regardless of the funding position of the scheme, should seek clearance [from the regulator]. Underfunding could trigger a contribution notice – a summons of money, from an employer or connected or associated party”. It is unlikely that contribution notices will be issued as the Pension Regulator’s spokeswoman, Amy Balchin, confirmed that the regulator has never issued a contribution notice but it has issued a couple of warning notices.
For the 10,000 British companies that once offered defined benefit or full salary pension schemes to their employees a large burden which lasts for many years is unavoidable and ultimately the point of this regulation is to protect pensioners. But whopping, great big pension deficits, coupled with new funding guidelines are another poisonous pill for buyout houses to swallow. Of course pension deficits are not ‘poison pills’ in the traditional sense that they can be used to avoid a takeover but the new guidelines to seek enhanced contributions and the billion pound plus price tags that are associated with these contributions can serve the same purpose as a poison pill – stopping a takeover. A private equity source says: “Pensions absolutely are a poison pill. They won’t kill the Boots deal but the pension trustees certainly did put a stop to the WH Smith’s takeover.” Now that regulatory clearance is recommended for leveraged buyouts of companies with pensions deficits, it adds another hold-up to deal completion in the UK. Balchin says that in the best-case scenario where the employers, new buyers and pension trustees are all in agreement, clearance can take as little as two days. But in cases where the pension trustees don’t know about a proposed takeover or don’t agree on the funding levels, the process can take months. Peter Linthwaite, chief executive of the British Venture Capital Association, says: “Pension fund deficits are a major factor in deal analysis. Of course the interests of pensioners are important, but we don’t want unreasonable demands.”
This pension tension is yet another contributing factor to the UK’s unpopularity in the buyout market. The UK, which was once the darling of the European deals, has been removed from the top of the league tables. The opening quarter of this year for UK buyouts was the worst in three years as the market crashed to just £3.4bn following the record of £9.3bn of deals completed in the closing three months of 2006, according to research house
The CMBOR research is actually the second statistical report revealing a reversal of fortune for the UK market. The first came courtesy of the European Private Equity and Venture Capital Association (
It is important that pensioners are protected and that the promises made to them are kept but trustees should not sacrifice the good of their current employees for those of the past. Current employees want to work for a strong and growing company and to make that a reality, buyouts are necessary in some cases and trustees shouldn’t be allowed to hijack deals.