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Selling a business with a UK defined benefits pension scheme 

  • Contributor
    Daniel Jackson
    M&A Principal Consultant
  • Contributor
    Tom Austin
    Director, Employer Covenant
  • Contributor
    Rob Scarth
    HR Consultant and Actuary

After a slow 2023, the UK business deals environment has started to liven up, driven both by the stabilisation of inflation and interest rates and by pent-up demand from would-be buyers keen to put their cash to work.

As a result, businesses for sale that have UK defined benefit (DB) pension schemes could find themselves in a surprisingly strong position. 

Until recently, sellers with DB schemes typically had to agree to significant discounts to reflect the regulatory risks and cash funding involved in the pension. But the last 12 months have seen notable improvements in DB scheme funding, with some even tipping into surplus - making them much less of a barrier to a profitable deal. Indeed, some buyers may see the surplus funds of a pension scheme as a potential asset from which they can extract value in the future. 

Making the most of your DB scheme

So how can you enhance your business’s DB pension for any potential buyer? Preparation is key, but there are several steps you can take over a six- to 12-month time horizon, both to make the scheme more robust and to enhance transparency.  
  • Insurance
    By insuring some or all the scheme liabilities with an insurer, you can take much of the pension risk off the table. Insurance has become a more affordable option recently, as increased competition and improving market conditions mean insurers are providing more attractive quotes. 
  • Investments
    Another option is to improve your pension scheme through a cash-flow matched strategy. The aim is to generate income sufficient to match benefit payouts to members, by investing in fixed-income assets; hedging can be used to protect against additional risks such as inflation. Additional investment gains can also be “locked in” to the plan this way. 
  • Flexible apportionment arrangement
    If your plan is part of a multi-employer pension scheme and is likely to detract disproportionately from the price you could otherwise achieve for your business, you could consider retaining the plan within the multi-employer scheme i.e. selling the business but keeping the DB scheme. 
  • Member options
    By offering members additional options around how they take pension benefits – for instance, enhanced terms if they transfer their pensions out of the plan – you may be able to reduce risk and liabilities at little cost to the company. 
  • Cleansing data
    Consider undertaking work to verify and cleanse the pension plan data, and documenting the audit trail to provide additional reassurance for potential buyers when they carry out pension scheme due diligence. 
  • Legal review
    Alternatively, you could provide greater clarity on the scheme structure and workings by commissioning an independent legal review of its governing documentation. This could look at considerations such as historic methodology and the balance of power between trustees and company.  
  • GMP equalisation
    A push to equalise guaranteed minimum pension (GMP) benefits would help to reduce uncertainty in this regard for potential buyers. 
  • Sell-side report
    A vendor due diligence report commissioned near the time of sale can be used to pull together relevant issues around the pension scheme for potential buyers, and to help the due diligence process proceed smoothly. A vendor assist report can also be valuable in setting out how the seller sees the future of the scheme and therefore its impact on pricing.
If you have the time available, then, there are many ways to strengthen the appeal of your business’s DB scheme for would-be buyers, and even turn it into a potential selling point. With M&A activity likely to become more widespread in the short to medium term, this is an ideal time for business owners planning a sale to act. 

Selling a business with a UK defined benefits pension scheme

Download a copy of our brochure to gain insights into how to make the most of your defined benefits pension scheme.
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Want help with how to making the most of your DB pensions scheme? Mercer’s highly experienced M&A team would be happy to discuss this with you, contact us to set up a free consultation.
Contributors
Daniel Jackson

- M&A Principal Consultant

Tom Austin
Rob Scarth

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