Key developments over recent weeks suggest the dynamic between pension fund executives and companies is changing where highly leveraged takeover deals are on the table. The financial status of pensions is becoming a more important component of any negotiations.

After months of talks, trustees of the £3bn (€4.5bn) Boots pension fund finally agreed a deal with buyout firm Kohlberg Kravis Roberts and Stefano Pessina, executive deputy chairman of Alliance Boots, to help shore up liabilities of the fund in this private equity takeover with a £1bn cash and "security package". Yet at the same time, ICI announced its talks with Dutch paints major Akzo Nobel had collapsed, and the pension fund announced it expects approaching companies to talk to them in the future before any deal can be agreed.

What it suggests is that the power of pension funds is shifting, largely because of the increased regulatory burden on trustees and the need to ensure they fulfil their fiduciary responsibilities to members.

Pensions consultancy firm Lane Clark & Peacock has taken a strong line in its attempts to get trustees to get involved in M&A deals, arguing defined benefit pension funds, in particular, can be "dealbreakers in international corporate transactions", regardless of which country they are based in, and trustees therefore have to know how to respond.

Indeed, the significant demand LCP has had from trustees for guidance, on the information purchasing companies might need, suggests pension fund boards now understand they have to get involved in talks.

Given the record numbers of leveraged buyouts financial markets are now seeing and the impact this could have on pensions funding, asset managers are beginning to recognise pension fund board members have the ability to make or break deals with their demands for appropriate financial support.

Guy de Blonay, manager of the global financials fund at London based New Star International, says it is no surprise pension funds are getting involved in M&A negotiations.

"I think it is logical to understand this could be the beginning of a trend of increased pension fund activity in deals because we are in an environment where leveraged buyouts are an important component of the market," said de Blonay.

"I don't know if it is the beginning of a trend of pension fund involvement, more perhaps a change of environment where leveraged buyouts are the dominant activity.

"But [pension funds] have to be more active in terms of important deals, they need to be proactive and try to read the [private equity] players to understand what their ultimate strategy is," he continued.

Rather than indicating pension funds have increased their powers, the need to get involved in merger talks appears to be because tight cash flow handling of private equity firms may be impacting the financial stability of pensions funding.

The UK's GMB union recently presented figures suggesting £2bn (€3bn) in pension deficits is in companies linked to private equity deals.

Likewise, it's an issue the UK Pensions Regulator (TPR) picked up in May, when it told pension fund trustees they must look more closely at the covenant guarantees offered by employers, and demand more financing from any takeover deal offered if they believe the way a buyout firm operates could weaken the long-term financial position of the fund.A spokeswoman for TPR notes it is down to pension fund trustees to ensure they act in the best interest their members so where there is a high leverage, for example in private equity transactions, they might want to "consider asking for higher mitigation than they otherwise might have done".

The UK regulator does not actually have the power to stop any takeover deal if it is thought there could be a detrimental impact on the pension fund. Its only power in respect to mergers, albeit the process is voluntary, is to approve or reject clearance of any M&A proposals - a position which has seen just three out 500 deals rejected since TPR took over from the Occupational Pensions Regulatory Authority in 2004. That said, any company might be wise to consider the liabilities of the pension fund in its negotiations, suggests TPR.

Similarly, governments are now beginning to question whether pension funds do have a key role to play, as seen when the UK government requested a closed meeting with The Pension Regulator's chief executive, Tony Hobman, in June to find out how pension funds might affect private equity buyout talks.

This means while pension funds might currently concentrate on meeting the regulatory requirements of international accounting standards board as well as those set by their local watchdogs, they may in future need to widen their base knowledge of private equity operations and the impact their activities can have on the long-term status of pensions.

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