Unlocking value and opportunities from UK pension funds – A Private Equity Perspective 

• 67% of PE firms stated that being able to access a scheme’s surplus, either at any time or at the point of the scheme being wound up, would make a business an attractive investment target.
• 63% of PE firms also pointed to the broader range of investment opportunities from well-funded DB schemes (i.e. more businesses with DB schemes are now transactable) as being the second most important benefit to them, followed by a lower risk of regulatory intervention (61%).
• 43% of PE firms have factored the favourable DB funding landscape into their investment strategies, with an additional 20% in the process of doing so.

From an investor perspective, there are a number of advantages to DB schemes being better funded. Our survey respondents cited the below, with 1 being the most important factor and 7 the least important.

Clearly investors are increasingly considering, and more open to, investing in businesses that come with a DB pension scheme. PE firms now see DB schemes as less of a blocker to investment decisions compared to the period pre-2022, when interest rates were at historic lows.

A key driver behind this renewed interest is the improved funding position of DB schemes, many of which have moved into a surplus.¹ With many schemes having moved from deficit to surplus, investor appetite for acquiring a company with a DB scheme has increased, across large cap to small cap investors.

For schemes that are in a deficit position, almost three quarters (74%) of all PE firms indicated that they either had no knowledge of or were unsure of the solutions available to schemes to de-risk and create value for investors in the long-term. Awareness varied depending on size of PE firm, with large-caps’ awareness over eight times greater relative to small-caps, 47% versus 5% respectively. A lack of knowledge and expertise in improving a scheme’s funding position, or awareness of options such as buy-in or buyouts means that PE firms could be overlooking attractive businesses that have a DB scheme in a deficit position.

Footnotes

1. According to the most recent PPF Purple Book, 80% of UK based DB schemes are in surplus, at a net funding position (on section 179 basis) of £358.9 billion.