£32.7bn of DB pension liabilities changed hands in M&A activity in 2021

Pensions are no longer seen as a ‘no go’ area in merger and acquisition (M&A) activity, according to LCP, after its analysis found that £32.7bn of defined benefit (DB) pension liabilities changed hands through corporate transactions last year.

LCP noted that new rules outlined in the Pension Schemes Act 2021 and by The Pensions Regulator (TPR) around how DB pensions should be handled in M&As were making them less of a ‘headache’.

The £32.7bn of DB pension liabilities that were involved in transactions in 2021 was 24 times the volume seen in 2020, although the consultancy noted 2020 may have been particularly muted due to Covid-19.

However, LCP found that 2021 was still “exceptional” by historic standards, with 2015, for example, seeing £5.5bn of pension liabilities transacted.

Alongside the new rules from the Pension Schemes Act and TPR, LCP noted that changes and innovations in the pensions market were making pension risks easier to manage.

There is typically a shorter run-off time horizon as schemes are maturing and they are generally better funded than in the past.

Furthermore, the introduction of DB superfunds this year is anticipated to provide another option that will help smooth the transfer of DB schemes in corporate transactions, as it could be a cost-effective way for acquirers to ensure members’ benefits are delivered whilst removing the risk from the corporate balance sheet.

LCP’s analysis found that there were 21 corporate transactions worth over £1bn completed in 2021 that involved DB pension schemes.

The largest DB scheme involved was that of Morrisons Supermarkets, with £4.4bn of liabilities, followed by the Daily Mail and General Trust’s £3bn scheme.

Commenting on the findings, LCP partner and M&A specialist, Alex Waite, said: “M&A deals can be incredibly complex and for many buyers the prospect of dealing with the technical details of transferring pension liabilities has historically been a headache.

“However, as 2021 shows, it's now no longer the case that it's a ‘no-go’ area for many buyers. Whilst the new rules do create the need for a more thorough transaction process, for those buyers who want to deal with their future pension commitments responsibly, there are now clear rules for how pensions should be dealt with in transactions.

“Although the pattern of activity through 2022 is difficult to forecast, early signs are that the pace of transactions established in 2021 is being maintained.”

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