DB pensions in corporate transactions – an opportunity, not a hurdle

A defined benefit (DB) pension plan can often cause problems for a company trying to find a buyer. The risks associated with DB plans mean that the ongoing cost can be volatile, whilst the cost of buying out benefits with an insurer can be prohibitively expensive.  

In addition to this, The Pensions Regulator (TPR) is due to be given new powers that may make corporate transactions involving DB plans more cumbersome. However, recent developments in the market have provided a new option for dealing with pension plan liabilities: capital-backed consolidation. This gives firms looking to engage in M&A activity a new and potentially more efficient way of being able to settle the liabilities of a legacy DB arrangement, which may improve the economics of a transaction. 

What does capital-backed consolidation offer?

Capital-backed consolidation has been a hot topic in the industry for the past few years, and there are now two vehicles offering non-insured risk transfer for pension plans at (in theory) less than the cost of buying out benefits with an insurer. However, these vehicles are designed to be an alternative to insurance, not a replacement; those plans that can afford to buyout would still be expected to do this by TPR (and by their trustees) and take advantage of the additional protection of insurance regulation. 

Our briefing note explains the key issues at hand, including how capital-backed consolidation works, what’s in it for the consolidator and what it can mean for M&A activity. We also discuss the potential risks for purchasers and consolidators, and explore how the new vehicles have the potential to facilitate more corporate transactions involving DB plans.

To find out more, please download the full briefing note below.