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Private equity muscling into Britain's booming retirement market

PRIVATE equity and credit firms have elbowed their way into everything from real estate to corporate lending. Now they're cracking open Britain's growing pension-transfer market.

A partner of US buyout giant TPG and Disruptive Capital Finance, owned by the Truell family office, are backing so-called superfunds that are poised to enter the business of taking over costly pension funds from companies struggling to keep them going. Insurers, which dominate the market, are expected to do more than £30 billion (S$52.7 billion) of transfer deals this year, according to consultants Lane Clark & Peacock.

Investors desperate for yield in a world of negative interest rates are increasingly turning to private equity firms in search of returns. This has fuelled the PE industry's expansion beyond the leveraged-buyout deals that remain their stock-in-trade. In the UK, superfunds are awaiting approval of their debut deals from a regulator that's pushing for consolidation.

UK companies have spent the last few decades trying to rein in their pension costs, which have soared as employees live longer, regulation tightens and returns on traditional investments such as bonds decline. This applies particularly to direct-benefit programmes that promise employees regular payments or a lump-sum when they retire. While few firms offer these plans any longer, they have to shoulder the cost as long as existing pensions remain on their books.

In the current market, companies can buy so-called bulk annuity policies from insurance companies such as Legal & General Group and Rothesay Life. Under these policies, insurers acquire the pension fund's assets as well as the obligation to make pension payments to its members. These so-called buy-out deals are costly, however. Walmart will incur a pretax charge to earnings of about US$2.2 billion as part of its plan to offload a retirement plan for employees of its British subsidiary Asda to Rothesay Life.

Private equity firms have a piece of this action through their investment in insurers such as Rothesay Life, which counts Blackstone Group and Singapore sovereign wealth fund GIC among its backers. Now they've set their sights on the struggling pension funds that can't afford insurance.

That's where the superfunds come in. They argue that because they don't face the costly capital requirements imposed on insurers, they can consolidate and manage pension plans at lower cost and generate better returns.

The UK government supports the emergence of superfunds, which it says could improve funding for many pension programmes as well as their investing power and governance.

However, it also warns of "clear risks" in allowing superfunds to set up shop without new regulations to protect retirees, and has proposed measures to prevent these companies from undermining insurers by doing transfer deals with pension funds that can afford a buy-out. BLOOMBERG