Monday, 25 June 2018

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    Due diligence is the key to a successful buyout

    Group head of reward Ben Fowler at family owned company Vestey Group explains how they took a multi-step approach to de-risking, culminating in a buyout

    Family-owned food and farming business Vestey Group de-risked its £500m 14,000 member Western United Group Pension Scheme over the course of three bulk annuity purchases, culminating in a buyout.

    Two pensioner buy-ins, one for £115m in 2011 and one for £111m in 2014, were combined with the remaining £280m of scheme liabilities to complete a full buyout in June 2014.

    Prior to de-risking, the scheme’s £500m assets vastly outstripped the company’s £100m value. While the scheme was well funded and prudently run, both the sponsor and the trustee board could see the risks posed by such a disparity, particularly in the aftermath of market turbulence in 2008.

    de risking index

    The buyout was the final phase of a long-term de-risking process which had seen the scheme convert its growth assets to protective assets such as gilts, cash and LDI strategies whenever suitable trigger levels were hit. By May 2013, almost all of the scheme’s assets had been converted in this way and the scheme was in an almost fully funded position on a gilts-matched basis. “That gave us the platform to look at further de-risking options,” says Ben Fowler, group head of reward at Vestey Group.

    “We found that once you are in the process of completing buy-ins, you are then in the market for other de-risking activity,”

    Once the scheme started carrying out its pensioner buy-ins, this opened up other opportunities. “We found that once you are in the process of completing buy-ins, you are then in the market for other de-risking activity,” says Fowler. On paper, the scheme was around 5-10 years away from being able to complete a full buyout, but favourable solvency levels combined with suitable annuity prices enabled the company to transact in June 2014.

    Having carried out its first two buy-ins with Rothesay Life, Vestey Group knew the company well, and understood its processes.

    The decision to de-risk meant bringing together a diverse range of views from within the trustee board and the family-owned company. “However, in the end everyone came to the view that it was not in the interests of the company to have such a big disparity [between the company value and scheme deficit] and that it wasn’t healthy for the scheme to be relying on a sponsor that is one-fifth of its size,” explains Fowler.

    “It’s easy to underestimate the number of steps involved in completing a buyout - we are still in wind-up now” says Fowler. “No matter how much work you accomplish in advance, there will still be a lot to do.” However, all the hard work has been worth it, with Fowler reporting a positive response from members. “As a family business, we were concerned about that.”

    Fowler says that the close-knit family structured supported the ability to transact quickly: “We could decide within minutes on what we would do - that might not be the case elsewhere. There was good preparation, a good counterparty and we knew we would follow through.”

    Vestey Group and Rothesay Life’s thorough due diligence meant that the scheme has a great deal of certainty and there are unlikely to encounter problems during the wind-up. “We went through all risks so there would be no lingering liabilities. The due diligence is very intense. Whatever prep you have done, there will still be more scrutiny. I’d advise anyone considering a buyout to find out as much as they can in advance, so that the process doesn’t derail or disappoint.”

    The due diligence is very intense. Whatever prep you have done, there will still be more scrutiny.

    One of the many positives to come out of Vestey Group’s experience has been Western Pension Solutions, a consultancy firm specialising in helping other family businesses to work through the same processes that the Western United Scheme has undergone. “Family businesses - especially multi-generational families - have a long-term focus and a desire to pass down the business. But they don’t want to pass down legacy challenges like a pension scheme to their children. We can help them to work through that”.

    “The really important thing was that everyone was happy at the end,” concludes Fowler. “There was surplus revenue so members even got a discretionary one-off increase. Shareholders are delighted, and the company is unshackled by its pension scheme.”

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