‘An ace in the hole’

Brian Spence

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There is no doubt that having a final salary pension scheme makes the sale of a business considerably more difficult and, in certain situations, completely impossible. However, is that necessarily always a bad thing?

Where a company is successful and the directors are looking to benefit from that success for the foreseeable future with no desire to sell, the existence of a final salary pension scheme can deter unwanted bidders.Any potential purchaser will be confronted with a number of possible hurdles:

  • How does he arrive at a reasonable assessment of the scheme liabilities? Historically, the company may be used to viewing scheme liabilities based upon the FRS17 disclosures in its accounts. However, this is unlikely to be a strong enough measure for any potential purchaser, especially given the relatively weak assumptions which can be used for FRS17 currently. Any purchaser is likely to want to discount its offer for a company by the buyout valuation assessment which exposes them to little or no risk. There could be a very considerable margin between these two assessments and clearly a move towards a buyout-type liability measure will reduce the valuation of the business below that which could realistically be considered by the seller. Clearly, this whole process is a negotiation based upon the relative strengths and objectives of each party.
  • The whole sale process is now much more cumbersome. The seller and potential purchaser are likely to be joined at the negotiation table by the pension scheme trustees, who are likely to have a vested interest in the outcome of any discussions. The level of trustee involvement is likely to be determined by the solvency position of the scheme, the financial position of each of the parties involved, the strength of the trustees negotiating position given the wording of the scheme rules and the level of Pension Regulator involvement required should the scheme need to go through a clearance process. Where directors and/or shareholders of the Company act as trustees of the pension scheme there are clear conflicts of interest. It is becoming increasingly common in such circumstances for a professional pension trustee to be appointed. This frees the directors/shareholders to negotiate robustly the company’s position with the trustee and purchaser. Members can be re-assured that their interests are being properly looked after by a professional independent trustee who is likely to have significant experience of similar situations – often considerably more than the two business parties involved. This is a complex process, and one which only the most determined buyer/seller will manage to get through.

So the pension scheme can act as an additional protection to the company in these circumstances should the shareholders wish to fend off unwelcome advances.

The unfortunate flip side of the equation is that the same hurdles and barriers will be apparent where the company is a willing seller.

There are steps a company can take to lower or remove the barriers to a transaction but effective implementation of the steps requires careful planning. These steps will result in an increase in shareholder value ahead of any transaction but with many parties involved they can rarely be achieved quickly with 9 – 12 months being a reasonable timescale.

As with so many things, the clear identification of objectives and the setting of realistic timescales is essential and the earlier professional advisers are involved in this process the greater its potential for success.

Brian Spence

Post by Brian Spence

Fellow of the Institute and Faculty of Actuaries and Society of Actuaries in Ireland, scheme actuary, professional pension trustee

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