There are two questions that we should be asking when reading this headline – “why?” and “why not?”. Why should private equity be looking to keep defined benefit pension schemes going and why they shouldn’t.

I expect that most of us do not consider those who run private equity firms as philanthropists and will instinctively jump to the conclusion that they are picking over the rotting carcasses of schemes that would be better laid to rest in the morgue known as “buy-out”.

That has certainly been the received wisdom of the undertakers and those who would have our once proud occupational pension schemes part of a “quiet graveyard”.

But we learn from Reuters that

Hedge fund Davidson Kempner and asset manager M&G  are racing to be among the first firms to inject capital to boost Britain’s 1.4 trillion pound ($1.77 trillion) pension sector….

Investment firm Aspinall Capital Partners pioneered the first capital-backed deal in 2020. Aspinall’s Chief Investment Officer Michael O’Connor said he was “hopeful” of doing another deal this year, and confident of deals in 2025, adding that there was “a lot of interest behind the scenes”…..

Pensions specialist Punter Southall is working with private equity firm Carlyle (CG.O), opens new tab and institutional investors to provide capital to pension schemes with assets of at least 250 million pounds, Punter Southall principal Richard Jones said.

And industry veteran Edi Truell’s Pension SuperFund Capital has offered to put “a couple of hundred million” pounds into Thames Water’s pension scheme in a capital-backed deal, Truell told Reuters. Thames Water declined to comment.

Why ?

Well, no matter how we might hold our noses, the outcome of running a pension scheme on can and should be better than buy-out , buy-in or the PPF.

Rather than swap a fully invested pension fund for an annuity backed by corporate bonds, trustees – inspired by a fiduciary duty to do the best for their members are looking to run their pension schemes on and harvest the rewards of long term asset growth. In the process they can be considered to be contributing to the E, S and G that makes our money matter.

Secondly sponsors are bulking at the premium they are being asked to pay by insurance companies to get pension liabilities off their balance sheets. As it becomes clear that the era of artificially depressed interest rates is over, they are waking up the probability that their pension scheme can be an asset rather than a liability.

Embattled sponsors such as Thames Water and Royal Mail have pension schemes that can be saved from corporate mayhem and can become part of the long term solution for weak sponsors. The surplus arising from well run pension schemes can be put to work levelling up the DC schemes towards DB levels and in capital expenditure that can make companies more productive and better able to meet the challenge of a green economy.

Capital backing can even be used to enable DC savers to convert to DB pensions enjoying guaranteed pensions with shared outcomes when things go well.

Why not?

The Reuters article is again instructive

Sources say there is increasing demand for the deals, as pension schemes have had time to reassess funding positions following a badly executed mini-Budget in September 2022, which sparked a jump in UK government bond yields and forced pension funds to sell assets in a hurry to get cash.

After two decades of being told to lock-down and prepare for an end-game, employers and trustees are at last coming out of the bomb-shelter and considering the sunny uplands. The 5,000 remaining DB schemes will split between those who want to pack it in and buy-out and those who want to run on.

There is a final matter to consider and this relates to the experts who advise both sponsors and trustees – the actuarial consultants. In April , a new actuarial standard came into force TAS300. I am grateful to William McGrath and TC Jefferson of C-Suite for alerting me to section 5.

To quote William McGrath, CEO of C-Suite

A numerical risk-benefit assessment is needed to comply with TAS 300.  The loss to members of falling into the PPF is modest and reducing, given the bases / amounts that the excellent, well-funded scheme covers.  PPF has had few new entries for some time.  The probability of the sponsor failure causing a scheme to enter it in the years ahead is low in a well- regulated environment.

Meanwhile, the probability of discretionary upside being available is rising because of surpluses and changed public policy towards accessing them.

Trustees addressing members’ best interests and their fiduciary duties have to go for a new deal with the sponsor to work in all stakeholders’ interests

No great rush

There is no great “rush”, these things take time. Time is needed to get capital in place to back the journeys on pension plans . Time is needed to get Regulators to move from an end-game mindset to a run-on mindset and time is needed for sponsors and trustees to accept that the capital on offer , may satisfy their fiduciary needs to do the best for members and the corporate need to do the best for shareholders and society at large.