£33bn of Defined Benefit (DB) pension liabilities changed hands in major M&A activity, according to an analysis by LCP.
New pension rules have increased the clarity regarding what is expected of buyers when it comes to dealing with pensions in big transactions, which used to be seen as a ‘no-go’ area.
According to LCP, new guidelines handed forth in last year’s Pension Schemes Act and by the Pensions Regulator regarding how defined benefit pensions should be handled in company mergers are making the issue less of a ‘headache.’ In 2021, the total amount of pensions handled was £33bn, which was 24 times the amount transacted the previous year. While Covid’s misgivings may have contributed to a subdued 2020, the year 2021 was nonetheless remarkable by historical standards. In 2015, for example, only £5.5bn in pension obligations were exchanged.
While the new rules have brought clarity to the pensions market, improvements and innovations are also making it easier to manage pension risks. With DB pension systems maturing, run-off time horizons are normally shorter, and schemes are substantially better funded than in the past. The FTSE100 DB schemes together have a pension scheme surplus of £60bn, according to year-end numbers for 2021.
New ‘Superfunds’ will be approved this year as well. This new alternative permits pension trustees to transfer the pension scheme – along with all of its assets and liabilities – to a new Superfund, which will be in charge of paying members’ pensions. This is an important breakthrough for corporate transactions involving a pension scheme because it means acquirers may be able to ensure pension scheme members’ obligations are fulfilled at a lower cost while also removing the risk from the company’s balance sheet.
Other findings include the fact that in 2021, we discovered 21 big business transactions involving DB pension schemes that were finalised, corporate agreements exceeding £1bn. The total amount of DB pension liabilities that were transferred was roughly £32,699m.
WM Morrison Supermarkets plc’s DB pension system, £4.4 billion in liabilities, was the largest. Following that, Rothermere Continuation Ltd purchased Daily Mail and General Trust plc, along with their almost £3.0 billion liability pension system.
The number of transactions and total pension liabilities transferred were unusually large, compared to only three similar-sized business transactions in 2020, with DB pension schemes totalling only around £1,358m.
Key transactions such as Cobham, G4S, Morrisons, RSA, and Selfridges, as well as the London Stock Exchange Group’s £19.7bn acquisition of Refinitiv Ltd, contributed to the large surge in M&A activity.
LCP partner and M&A specialist Alex Waite says: “M&A deals can be incredibly complex and for many buyers the prospect of dealing with the technical details of transferring pension liabilities has historically been a headache. However, as 2021 shows, it’s now no longer the case that it’s a ‘no-go’ area for many buyers. Whilst the new rules do create the need for a more thorough transaction process, for those buyers who want to deal with their future pension commitments responsibly, there are now clear rules for how pensions should be dealt with in transactions.
“Although the pattern of activity through 2022 is difficult to forecast, early signs are that the pace of transactions established in 2021 is being maintained”
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