UK - A proposal by ex-Prudential executive Mark Wood to buy out up to 50 closed corporate defined benefit pension schemes could appeal to corporates as a means of avoiding potentially confrontational relationships with trustees.
Corporate-finance specialist Hawkpoint Partners and broker Numis have been approached by Wood to help set up the venture, which is still in an embryonic stage.
Kevin Wesbroom, senior actuary at Hewitt Associates, said: “From a corporate point of view, there’s no doubt a lot of corporate sponsors will find dealing with trustees increasingly irksome. If there is a corporate solution that enables things to be dealt with without intervention from trustees, that would have significant attractions for some corporates.”
Myles Pink, a director at Hawkpoint Partners, which has been appointed by Wood to provide overall advice on structure and fundraising, said: “It is not yet clear exactly how it would be structured but the overall principal would be to capitalise the business as an FSA (Financial Services Authority) regulated entity that will buy out defined benefit pension schemes.”
The practice of buying out DB schemes would not be dissimilar to bulk buy out services offered by insurance companies such as Legal and General (L&G) and Prudential, who buy bulk annuities for members.
However, one industry source speculated that Wood’s enterprise might differ in that it could act more like a hedge fund, investing aggressively and charging an annual management fee in order to make a profit over a long term horizon.
He added: “If you add incentives, some heavy gearing on the performance... there’s the potential to make some serious money out of managing these portfolios, independently of whether they are going to charge administration or consultancy fees.”
It has also been suggested such a route would appeal to corporates as a cheaper alternative to the insurance company annuity solution. L&G and Prudential currently have a monopoly in that market.
“If I am a company who has closed my [pension] scheme down and have a closed book of business there’s a price at which I would be prepared to write a cheque out to get the whole thing off the company balance sheet,” the source added.
Bob Scott, partner, Lane Clark and Peacock, added: “L&G and Prudential are very heavily regulated so effectively they have to invest their money largely in government and corporate bonds, and hold reserves over and above what would be required on normal assumptions, so the amount they have to charge for taking on the liabilities is very high. If [Wood] can set these up under a different environment, using his investment expertise, he could generate sufficient money at a lower price.”
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