Pensions Issues in European Mergers and Acquisitions

Excerpt from a recent issue of International Finance & Treasury
By Rosalind J. Connor, Daniel C. Hagen, Emmanuelle Rivez-Domont, Georg Mikes, Friederike Göbbels, Carla Calcagnile, and Chantal Biernaux, of Jones Day

Pensions-related issues have long been a major concern in M&A transactions in the United States. Issues relating to funding can color the attractiveness of a transaction, and liabilities relating to multi-employer plans and to postretirement medical expenses can have a significant effect on the economic viability of the transaction.

Pension obligations continue to cause problems, particularly given growing longevity, which gives rise to significantly increased costs. The growing global trend towards more disclosure of pension liabilities in company accounts has also moved pensions further up the agenda in corporate transactions.

These matters are of growing concern across Europe, which is experiencing both increased longevity and enhanced disclosure requirements. However, the particular issues are very much country-specific, and it is important to be aware of what particular issues may arise in any specified jurisdiction on an international M&A transaction. The latest issue of International Finance & Treasury, published by WorldTrade Executive, reviews the pension provisions in a number of European jurisdictions and the issues to be alert to in a transaction involving pensions plans. Among the findings:

United Kingdom. The United Kingdom is most like the United States in terms of benefit provision. As in the U.S., businesses in the U.K. that provide pensions usually do so through a trust held separate from the company's assets and, as in the U.S., the company has obligations to ensure the pension plan is properly funded following regular plan valuations, which in the U.K. are carried out every three years.

The U.K. Parliament has closely followed ERISA in its recent reform of pension funding and, in particular, established a Pensions Regulator and a Pension Protection Fund, which have between them powers very similar to those of the Pension Benefit Guaranty Corporation. However, some of the powers are significantly more expansive, as the U.K. is eager to avoid the deficits that the PBGC is presently facing.

Any acquisition of a U.K. company with a defined-benefit pension plan may raise significant issues. It is worth obtaining local actuarial advice as to the funding level of the plan, as the plan valuations may not be accurate. This is not only because the valuation is triennial and therefore may be very out of date, but because the basis for agreeing valuations changed in 2005 and is significantly more onerous and less predictable as a result.

In addition, the U.K. Pensions Regulator has the power in a number of circumstances, including where it believes the plan sponsor is insufficiently resourced to meet its pension liabilities, to bring a direction against any group company requiring it to fund the pension plan. Group companies and shareholders that may be subject to this requirement include non-U.K. companies and, in fact, the Pensions Regulator is in the process of issuing one such direction against Sea Containers Ltd., a Bermudan company that is presently in chapter 11 bankruptcy proceedings in the United States.

In order to limit the risks from the Pensions Regulator, it is common practice for the purchaser to seek clearance from the Pensions Regulator as a condition of closing.

France. In France, most pension contributions are made by way of mandatory contribution to a national social security system that also covers health care and welfare benefits. The contributions are very significant but are a standard cost of employing staff in France and should be reflected in cash flow. Due diligence is important to ensure these costs are understood.

The major concern in France will relate to senior employees, who are often provided with a top-up pension. These benefits can be very generous, although they are tax-advantageous. Appropriate due diligence is necessary to understand the extent of these liabilities and costs.
More