How will your defined benefit pension scheme affect your ability to acquire?
June 24, 2014
After a period of disappointing economic growth, we’re now starting to see positive signs of recovery across most sectors and regions in the UK. This, coupled with a reduction in defined benefit (DB) pension deficits (driven by a sharp rise in gilt yields), has led to a significant improvement in the ability of FTSE 350 companies to support their DB pension obligations.
Our Pensions Support Index (PSI) has shown a 7 point increase over the second half of 2013 to 83 (out of a possible score of 100). This is the largest positive movement since December 2009 and pushes the score back up towards pre-recession levels.
This improvement in PSI score provides companies with an opportunity to consider whether they can increase risk and/or reduce contributions to their pension scheme. Central to the Pensions Regulator’s new code of practice (released on 10 June 2014) is a focus on establishing a link between employer covenant, funding and investment strategy.
So what does this mean for deals activity?
A continued improvement in market confidence has helped generate an increase in capital market activity (e.g. initial public offerings (IPOs) and capital raisings) and mergers and acquisition (M&A) activity over the last 18 months. This peaked in Q4 2013, with 64 deals being completed in the quarter, making it the best quarter of 2013 in terms of M&A volume. According to PwC’s recent Deal Index, this trend is expected to continue.
Understanding the impact of a transaction on a DB scheme employer covenant is vital. Pension trustees need to ensure that a transaction does not reduce the likelihood of members’ benefits being paid – where there is a material detrimental impact on the strength of the company, both management teams and trustees will need to reach agreement on the size of the detriment and whether any steps need to be taken to better support the pension scheme.
We are seeing increasing purchaser appetite to take on pensions risk, however those companies with a lower PSI score may miss out on M&A opportunities if the risk of a poorly supported DB scheme is too great. Giving early consideration to how you might address the liabilities in a potential transaction will reduce the likelihood that these become a barrier to a deal.
Trustees and transactions
For larger deals, both vendors and purchasers should be mindful of the 2013 amendments to the Takeover Code, which now gives trustees an even louder voice in a listed transaction. In particular, these changes will give trustees the right to publish their opinions on a transaction in the offer circular which will, in turn, raise the profile of the scheme with key stakeholders. This process needs to be carefully managed to avoid complicating negotiations and destabilising a deal.
Download your copy of the Pensions Support Index and watch our short video on the subject here.
How does your company score in our PSI? How does this compare to your peers? How will this impact on your ability to grow/acquire, and what can you do about this?
Share your thoughts below or set up a meeting to discuss things more confidentially.
