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Impact Investing

IPE special report May 2018

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MBOs show little time for pension arrangements

Two-thirds of management buy-out (MBO) companies, say they consider the pension scheme aspect of the firms they buy-out is unimportant or not even mentioned in the purchase negotiations.

The research conducted by Professor Martin Collins of City University Business School on behalf of manager of manager investment group SEI, reveals that even when the topic of the pension scheme does arise, the main talking point is the transfer process of funds and rights rather than the future management of the scheme.

Professor Collins surveyed 78 recent MBO companies with turnovers of up to £500m, with the objective of determining the role of the pension scheme in the MBO deal and the involvement and interest of company management in the managing of the scheme.
The results were compared to those of a general survey of large companies, in which 50% had pension funds valued at over £100m.

Three quarters of the responding senior MBO executives seem to resent giving up their time to manage the pension fund, with 78% noting that they would like ‘to have confidence that the pension fund is running smoothly with minimum attention from me’.

As a result MBO companies are much more likely to outsource pension scheme administration (90% compared to 40% of general large companies).
Several advantages of outsourcing are offered by the MBO groups, with 95% agreeing that it gives access to specialist expertise and 80% saying it allows them to gain from investments made by the provider and that it frees them up to concentrate on the running of the business.

Patrick Disney, head of institutional business development at SEI Investments in London, says the research is pertinent in the light of recent bear market conditions: “A lack of analysis is fine in bull market conditions, but when there is a bear market what happens to a company when it discovers that it has to stump up for the liabilities of a pension scheme?”

Disney says SEI’s recent mandate win from the £18m (e29m) pension fund of Meconic – a specialist manufacturer of pharmaceutical ingredients and chemicals, came about through the company wishing to outsource this aspect of its operations to “free it up” for the running of its core business.

Most MBO companies said they used advisors in the running of the schemes, but the majority were critical of the work done, with 55% describing consultants as reactive rather than proactive and 49% agreeing that investment issues were only addressed when something had gone wrong.

The research also reveals that MBOs appear to be less concerned about changing the pension arrangements of buy-out companies, or responding to legislative pressure.
76% said they had made no changes as a result of the 1995 pensions act and only 20% were planning to do so.
Four fifths of MBO companies were also planning no changes in anticipation of Fred 20, or its accounting alternative.

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