Pensions in Deals: opportunity knocks

The UK economy is in a period of renewed confidence but our latest Pensions Support Index shows that FTSE 350 companies’ ability to support their defined benefit (DB) pension obligations has improved by only one point over the first half of 2013 (to 76 out of a possible score of 100 - a score of 90 and above indicates DB pension issues have been largely addressed).

Our analysis shows that the recent gains in the stock market and a renewed confidence in the economy are not yet feeding through to company results and more manageable pension deficits, and therefore for the present time, pension schemes will continue to be a key factor to be considered in many UK deals.

Nonetheless, we are seeing an increasing number of parties willing to tackle complex pension problems to achieve a deal where a business has good underlying fundamentals. As a result, despite a relatively low level of transactions in the market recently, there are still opportunities.

We are also seeing savvy trustee boards taking a more pragmatic view of deals, mindful that, by being commercial, they may assist in a deal that ultimately improves the security of their members’ benefits.

This may be assisted by the recent Scheme Funding Code of Practice that was released by the Pensions Regulator at the beginning of December 2013. This outlined how the Pensions Regulator will use its new statutory objective to minimise any adverse impact on the sustainable growth of an employer, and this clarity may provide a degree of comfort to prospective purchasers.

In the last quarter (Q3 2013) there has been an increasing appetite for Initial Public Offerings (IPOs). This may open up an interesting opportunity for vendors because markets tend to factor in pension deficits at a lower price than trade or private equity purchasers.

However, both vendors and purchasers should be mindful that recent changes to the Takeover Code mean that trustees will have a louder voice in a listed transaction. This includes the right to publish their opinions on a transaction in the offer circular, raising the profile of the scheme, for better or worse, with key stakeholders. It will be interesting to see how this is used by trustees and how it impacts on a deal.

For more information about the Pensions Support Index please see our latest release where we discuss the Index in more detail and explore the implications for companies and trustees.

Is your company looking more or less likely to be able to support its DB pension obligations? How will this impact on your ability to grow/acquire etc? Contact us to set up a meeting to discuss this in more detail.

Alex Wilson | Partner
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James Berkley |  Pensions Credit Advisory Director – Deals
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