PRT deals can have 'positive impact' on companies' market values - Mercer

The share prices of companies that have transferred their pension obligations to an insurer typically perform better than their peers', according to analysis by Mercer.

The firm found that in general, undertaking a pension risk transfer (PRT) does not appear to be hindrance, with “reasonable evidence” that it can have a positive impact on the sponsor’s market value.

According to the report, over half of the firms analysed had share prices that outperformed their peer group at each measurement point.

Furthermore, as an "overall average", around two thirds of the companies had share prices that outperformed their peers, compared to one third which underperformed.

It also revealed that the average amount of outperformance of a company’s share price relative grows over time after the announcement, ranging from 0.25 per cent to 3 per cent depending on the time elapsed.

Mercer noted that this may perhaps be surprising to some commentators, as PRTs can often require cash or negatively impact the company’s balance sheet.

The report, entitled The impact of pension risk transfer on share prices of UK sponsoring employers, will be the first in a regular series, and is thought to be the most extensive analysis of its type ever carried out in the UK.

It examined the share price reactions of over 70 public transactions completed since 2007, for schemes where the sponsor is a UK-listed company.

It acknowledged that there are “clearly a large number of factors that affect share price beyond pension issues”, stating that as such, it used the averages for the population as a whole, only in forming conclusions.

The firm monitored share prices one day, one week, one month, three months and six months after the transaction announcement, with all movements in share prices compared to the movements in their respective peer group.

The report acknowledged that there is a query however, as to whether companies with better-performing share prices tended to transfer their pension risk to insurers, or whether transferring pension risk actually drives the stronger performance.

However, Mercer clarified that “importantly”, the majority of the transactions were reported on different dates to other company announcements that might have impacted share price movements.

It explained that, in this context, any improvement in the relative share price starting from the date of the transaction announcement is more likely to be due to that announcement than the share price consistently outperforming its peers.

The report also highlighted that on average, the share prices analysed had outperformed over a period when the companies often have reduced funds, often as a result of making discretionary contributions into their pension plans to permit the transactions to take place.

It stated: “The companies could have deferred their transactions and spent shareholders’ money on something with potentially more obvious immediate benefits.

"Yet investors tend to reward these companies by selecting the shares over the company’s peers.

“The increase in positive impact over the months following a transaction announcement could suggest that shareholders become more supportive of a decision to fund pension insurance the longer they have to digest the information.”

The report highlighted that PRT can often leave company management with more time to run the business, supporting the correlation with improved company performance.

The report concluded: “It is clear is that spending large amounts of capital to insure pension risk does not have to be bad for a company’s share price and is often correlated with a beneficial effect.

“Investors who are sometimes criticised for short-term thinking appear willing to take a longer-term view when it comes to proactively managing pension obligations via insurance.”

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