Having raised £250m of funding from Chinese investors last year, one of the UK’s largest pensions buyout businesses is speculated to float on the stock market to further aid its expansion.
The CEO of Pension Insurance Corporation Tracy Blackwell commented, “there is no pressing need at all” but “If the market really takes off even more than what we’ve seen, we will need access to capital and what it will come down to is whether that capital comes from the private markets or the public market… It’s about where the best capital is.”
The firm has grown in the past decade to run or insure £18bn of pension funds and the demand from companies looking to offload old pension liabilities doesn’t seem to be affected by the uncertainty around Brexit.
UK firms have almost £2 trillion in defined benefit pensions liabilities. These schemes, often called final salary pensions offer workers a guaranteed income upon retirement. While lots of these schemes no longer allow new accruals, the existing debts reach decades into the future.
The Pension Protection Fund, which rescues insolvent pension funds, states nearly 4,300 of these schemes were in deficit at the end of November 2016, compared to 1,522 in surplus. These figures change every month depending on the movements of financial markets and funding decisions made by the firms themselves.
Interest rates and bond yields are at record lows, giving the schemes investments poor returns, worsening deficits and possibly raising the cost of any buyout.
However the pension deficit is a problem large and medium companies are becoming scared to ignore, with regular mainstream discussion of the topic as part of the BHS Phillip Green scandal and lots of companies are choosing these pension buyout deals as a way of fulfilling their responsibility to their pension scheme members.
One worry is that the consolidated nature of the buyout market could lead to a very serious issue for the Pension Protection Fund and possibly the members of these schemes should one of these insurance companies fail.