Opportunity for buyers as DB pension surplus growth continues

The aggregate funding position of FTSE 350 companies’ defined benefit (DB) has undergone a "complete reversal" over the past 18 months, Mercer's latest Pensions Risk Survey data has found.

The tracker showed that the aggregate funding of FTSE 350 companies' DB schemes stood at £68bn at October 2023, recovering from roughly the same level of deficit (£69bn) at the end of Q1 2022.

Mercer also suggested that changes in DB schemes’ funding position could be set to play a more positive role in potential transactions, with 2024 set to be a busy year for restructuring and merger and acquisitions (M&A) activity.

Indeed, the group said that, for companies considering M&A activity, many DB pension schemes might no longer be considered a risk to be avoided and instead, might be perceived as a valuable addition to any deal.

Mercer senior corporate consultant, Shane Tuohy, stated: “Buyers looking to acquire UK businesses have historically been cautious of the presence of a DB pension scheme and the associated up-front funding, particularly when schemes are in deficit.

“The sustained surpluses we are seeing across company pension schemes could now lead to a step change in how DB schemes are viewed as part of wider corporate transactions.

“Buyers who are looking to acquire targets with DB schemes have a number of options for creating deal value.

“Some might be able to take the scheme off company books at little or no cost by securing the benefits with an insurer. Others might choose to run schemes on to extract value. They might offer enhanced security in exchange for an investment strategy which works harder or insure part of the risk associated with the DB scheme via the use of a captive vehicle.

“A strong funding position does not eliminate all of the issues associated with a DB scheme though. Trustee engagement, careful governance and risk management, which still have costs associated with them, are crucial, as is the necessary due diligence process as part of any deal.”

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