Take It Away

CFOs in Britain now have a number of ways to offload pension schemes.

Ian Griffiths is used to dealing with pensions. As finance director of Emap, a £884m (€1.2 billion) UK media group, the topic has been discussed at every board meeting he’s attended since his appointment in 2005. But the future of the company’s two defined-benefit schemes took on a new relevance last July.

That’s when its pensions — the first being an old Emap scheme, the second linked to Scottish Radio Holdings, which it bought in 2005 — were put under review as part of a larger discussion about whether Emap should sell its radio and magazine divisions. The big concern was the pension deficit — a gaping hole of £8m (on an IAS19 basis as of September 30th 2007). Griffiths and other Emap executives wanted to avoid the drawn-out discussions that could develop if an acquirer was worried about the schemes. “I’ve always been of the view that if it’s possible, we shouldn’t let the pension issue — because clearly it is an issue, as it’s a cash requirement — get in the way of the business strategy,” Griffiths says today.

To find a solution, Emap turned to Paternoster, a two-year-old pension insurance firm that buys out companies’ schemes. Its clients include a UK subsidiary of Italian energy group Eni and P&O, a shipping company owned by Dubai’s DP World. Firms such as Paternoster and Pension Corporation are making a name for themselves in the buyout market alongside established insurers such as Legal & General and Prudential.

Pension buyouts are nothing new. The market developed in Britain following the Pensions Act 2004, under which the pensions regulator can force companies to address any deficit in their scheme. Insurance groups responded by offering to buy out pensions and take them off the balance sheet.

What is new is the type of company that decides to offload its plan. Once used only by companies to wind up small schemes during insolvency proceedings, pension experts reckon buyouts will become increasingly popular among healthy businesses and those considering other types of deals, such as Emap’s strategic review.

Wrestling with Risk

Until now, however, “there has been a lot of inertia,” says Charlotte Crosswell, a partner at Pension Corporation. Scheme trustees have generally been the party to consider a buyout, she says, although many have been put off by the cost or the fact that it’s a relatively new industry. But Crosswell adds that recently more CFOs have been asking the firm about their options. As more high-profile deals are announced, she says it may not be long before shareholders too call for the certainty that can come from insuring a company’s pension scheme.

One reason for the buyout experts’ optimism is the relatively good shape that pension schemes are now in. Risk consultancy Aon claims that almost half of all UK schemes have started 2008 with a surplus, so if any one did a buyout, it could transfer its pensions without having to inject more money. “When you’ve been wrestling with a pension scheme for years, that’s an enormously attractive proposition,” says Mark Wood, founder of Paternoster.


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