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Pensions are "deal or no deal" issue in M&As - LCP

GLOBAL - Getting pension accounting sorted and knowing a company's true pension costs now rank among the most important issues in any merger and acquisition transaction, Lane Clarke & Peacock (LCP) has told company representatives.

"Final salary defined benefit plans are often dealbreakers in international corporate transactions," LCP pointed out at a briefing for international companies today.

The consultants stressed the importance of  providing information about longevity assumptions and liability calculations to the prospective purchaser in order to avoid last-minute surprises.

"Although pension arrangements, legislation and stakeholders are different in every country, there are similar themes such as what are the risks involved in a pension arrangement, how are the liabilities measured, what are the costs of the scheme, what about longevity or a possible move to defined contribution," LCP partner Colin Haines told IPE.

LCP has seen demand for support from its 18-staff strong M&A pension division increase, especially from companies involved in international transactions.

Haines said some of the issues being raised, for example, apply to DC pension schemes in Germany, Switzerland and Belgium, and involve guarantees on returns because the schemes are effectively DB schemes.

Similary, guidance is being sought concerning the new Italian requirement on employers and employees to place severance pay in separate funds, potentially leading to a change in the cash flow of a company, or questions such as how to get out of multi-employer plans.

But one of the biggest issues is a lack of information on mortality assumptions with many companies, especially outside the UK, Haines pointed out.

"In the UK, there is a high level of awareness of people living longer," he explains.

"Trustees of UK plans want to have quite prudent mortality assumptions which means big changes. Other countries often use off-the-shelf mortality tables often without allowance for future improvements."

But Haines is convinced the level of awareness in the UK will soon spread to other countries.

Furthermore, he thinks other regulators might follow The Pension Regulator's example and issue guidelines on mergers for pension stakeholders. Pension regulators might even become more involved in negotiations, especially when the covenant between employer and pension scheme changes, he suggests.

LCP has warned leaving the pension issue to last in M&A transaction negotiations might lead to complications.

"It is good for sellers to know where their own red flag in the pension arrangements might be," Haines explains.

"The last thing they need is a potential purchaser saying that it does not like the assumptions and changes them. Companies selling parts of their business need to understand where a potential purchaser might come from so that they can have the appropriate strategy in place and can give the information needed."

Haines also believes companies need to be thinking earlier about possible changes to pension plans ahead of actual signing a deal, as well as how corporates might present proposals to trustees and regulators, to achieve a better chance of acceptance.

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