Pension scheme liabilities can scupper potential acquisitions and mergers, but is that a bad thing?
There’s is no doubt that having a final salary pension scheme makes the sale
of a business considerably more difficult and, in certain situations, completely
impossible. But is that always a bad thing?
Where a company is successful and the directors are looking to benefit from
that success for the foreseeable future with no desire to sell, the existence of
a final salary pension scheme can deter unwanted bidders.
And when finances are under pressure and lending availability at a premium,
it’s all too easy to just put any company with a final salary pension liability
in the ‘too difficult to deal with’ pile and this may well suit some companies,
particularly in the short term.
There are a number of issues that any potential purchaser or vendor will need
to be aware of to allow them to identify their strategy and to give them the
best chance of pursuing it successfully.
Consideration needs to be given to how you arrive at a reasonable assessment
of the pension scheme liabilities. Historically, companies may be used to
viewing scheme liabilities based upon the FRS17 disclosures in their accounts.
However, this is unlikely to be a strong enough measure for any potential
purchaser, especially given the relatively weak assumptions which can be used
for FRS17 currently.
The ultimate liability with which any purchaser would be faced would be the
cost of securing benefits for all the scheme members the buyout cost. Any
purchaser is therefore likely to want to reduce its offer for a company by the
level of deficit shown in the buyout valuation assessment as this exposes them
to little or no risk. There could be a very considerable margin between these
One recent scheme I looked at had an FRS17 deficiency of less than £2m but a
buyout liability of closer to £12m. Clearly a move towards a buyout-type
liability measure could well reduce the valuation of the business below that
which could realistically be considered by the seller.
This whole process is a negotiation based upon the relative strengths and
objectives of each party. Even where companies are looking to deter bidders this
deficiency gap is something they are going to have to address over a period of
time if any sort of a share sale is likely to be of interest in the future.
This is a time consuming process and companies need to consider grooming
themselves for sale, often many years prior to the actual event.
The sale and purchase process is very time consuming and expensive given the
number of professional advisers likely to be involved. Experience suggests that
final salary pension liabilities can often be a real deal-breaker and, if this
is likely, they need to be identified and valued very early in the process
before lots of money is committed to what could ultimately become a futile
All too often the pension scheme is considered as an afterthought and not
given sufficient priority so little planning can be done and lots of money and
effort is wasted. A desk-based ‘broad-brush’ independent assessment of the
scheme liabilities can be carried out very cost effectively and, if carried out
in conjunction with a legal review of the scheme documents, can identify the
extent to which the pension scheme will act as a barrier. It can also identify
issues which may need further investigation and allow a sensible strategy to be
The whole sale process is also now much more cumbersome. The seller and
potential purchaser are likely to be joined at the negotiation table by the
pension scheme trustees, who are likely to have a vested interest in the outcome
of any discussions.
The level of trustee involvement is likely to be determined by the solvency
position of the scheme, the financial position of each of the parties involved,
the strength of the trustees negotiating position given the wording of the
scheme rules and the level of pension regulator involvement required should the
scheme need to go through a clearance process. Where directors and shareholders
of the company act as trustees of the pension scheme, there are clear conflicts
It is becoming increasingly common in such circumstances for a professional
pension trustee to be appointed. This frees the directors and shareholders to
negotiate robustly the company’s position with the trustee and purchaser.
Members can be reassured that their interests are being properly looked after by
a professional independent trustee who is likely to have significant experience
of similar situations often considerably more than the two business parties
This is a complex process and one which only the most determined buyer or
seller will manage to get through.
So the pension scheme can act as an additional protection to the company in
these circumstances should the shareholders wish to fend off unwelcome advances
or be a very frustrating barrier where a sale would otherwise be contemplated.
There are steps a company can take to lower or remove the barriers to a
transaction but effective implementation of the steps requires careful planning.
These steps will result in an increase in shareholder value ahead of any
transaction but with many parties involved they can rarely be achieved quickly
with nine to 12 months being the minimum timescale which could realistically be
As with so many things, the clear identification of objectives and the
setting of realistic timescales are essential.
David Davison is a director at
& Partners, independent actuaries and consultants