Creating deal value from defined benefit pension plans 

Often seen as downside only risk, many DB plans now find themselves in surplus, leading to new opportunities to release value from well-funded plans.

Daniel Jackson, M&A Principal Consultant, Mercer UK, explains some of the key factors at play. “The improvement in funding position of DB plans in the last year or two has meant that many plans are now able to be fully passed onto an insurer with little or no cash cost to the employer. In particular, in an M&A context, buyers can plan for this in their business case and transaction pricing, taking DB pension risk off the table at the deal outset.”

He adds, “Furthermore, we are increasingly helping clients to release value from DB pension plans that are in surplus following a transaction. In some cases that might be about using a protected run-off solution, to provide the plan with additional security. For example, a surety bond to fund the plan above an insurance buy-out level. We are also seeing an increase in captive insurance solutions to enable the employer to effectively ‘self-insure’ its pension risk. This gives the employer greater access to the plan assets and returns on those assets.”

For those acquiring DB plans that are not yet in a surplus position, it is important to keep in mind that improvements in funding position under your ownership will lead to a positive balance sheet impact and increased deal value upon exit. This of course should be balanced with any additional cash requirements that the trustees make at the time of the deal due to the impact of the transaction itself.

“Transaction pricing for DB pension plans often focuses on the cash funding deficit and the trustees’ likely reaction to the deal - therefore how much cash a buyer may need to put into the plan upfront and in the future. There are actions a buyer can take to reduce the amount of cash an employer is expected to put into the scheme which can directly improve value upon exit” explains Daniel.

A combination of a) improving the security offered to the plan, b) optimising asset returns and c) offering members additional options with their benefits can all serve to reduce risks and ultimately the cash asked for by the pension plan trustees. Put simply, a buyer wants to make sure that the price chip for the pension plan upon acquisition accurately reflects the risk taken on and to take action to ensure that the price chip upon an exit is lower than upon entry (less any cash input).

All of which means that DB pensions have gone from being a deal risk to be avoided, to a serious value creation opportunity to be considered as part of an M&A transaction.

Want help to create deal value from your deal with a DB pension plan? Our M&A team would be happy to discuss the opportunities for unlocking value and reducing the risk of your deal. Contact us to set up a free consultation.