Pension issues can be a major factor influencing merger and acquisition activity. Companies may pull out of deals due to uncertainty around pensions (especially uncertainty over the funding of defined benefit plans). Pension plan deficits are now part of corporate life and how the deficit and the other pension issues will be dealt with needs to be considered early on in the deal. Outlined below are five pension issues we have seen arise in recent transactions and some solutions found to deal with them.
1. Funding Issues
A purchaser will usually prefer to structure the deal to allow it to take on the target without any defined benefit liabilities or at least to take on limited or fully funded defined benefit liabilities. There are a number of ways this may be achieved, including:
2. Invalid Deeds of Amendment
Deeds of amendment which reduce benefits may be declared invalid in the event of a challenge from a member if, for example, the amendment breaches a restriction in the amendment power on reducing accrued rights or tries to correct a past mistake. If such a deed is invalid, the plan’s funding position may be worse than it appears. Detailed due diligence is required to analyse if this is a potential issue. If it is an issue, from a purchaser’s perspective, it is better to crystallise the liability and seek appropriate funding from the vendor rather than rely on an indemnity in the sale agreement. This is because potential claims may not be made until after the limitation period applying to an indemnity expires and any attempts post-closing to crystallise a liability may invalidate the indemnity.
3. Plan provisions
Measures to limit the purchaser’s defined benefit liabilities post closing often require the co-operation of the plan trustees. One of the most important parts of the due diligence process is to consider who controls the key powers under the plan’s provisions:
4. Industrial Relations Issues
While it may be possible (subject to employment law) to avoid establishing a defined benefit arrangement for the target’s employees post closing, industrial relations issues need to be on the radar when contemplating a transaction involving a defined benefit plan. Pension entitlements are increasingly at the forefront of employees’ minds. While there is a strong move away from defined benefit to defined contribution pension provision, a loss of defined benefits and a new owner may give rise to IR issues. This is significant, because:
- many employers who operate defined benefit plans are unionised;
- there is a strong social partnership culture inIreland; and
- there may be a significant number of fora to which a disgruntled employee may take claims based on the same facts which can cause significant management headaches.
5. Contractual Issues
While it can often be difficult to arrive at a definitive view, an analysis will need to be carried out to determine whether employees can claim a contractual entitlement to a particular type or level of pension benefit.
Pension issues in mergers and acquisitions can be significant and may affect decisions as to the price and the structure of the transaction. Pension issues are becoming more complex and need to be examined early on in the transaction in order to avoid significant problems down the line.