New mindset needed when assessing DB schemes in corporate deals

Regulatory changes and continued high levels of defined benefit (DB) funding mean a new mindset is needed when assessing DB schemes, LCP has said, suggesting that schemes could increasingly be seen as an asset rather than a liability in corporate transactions.

The group highlighted the July 2023 Mansion House announcements, including reforms around the use of surplus, and recent industry debates around a public sector DB consolidator as demonstration of a potential softening in attitudes to employers accessing surplus.

However, it admitted that there is uncertainty around how the value of the surplus can be realised, warning that careful judgement needs to be applied to the specific circumstances before coming to that conclusion.

In particular it encouraged pension scheme trustees to understand how robust a surplus may be, by looking beyond just the accounting surplus and, for instance, measuring the scheme’s funding position on a self-sufficiency measure.

It also stressed the importance of taking a close look at the scheme’s governance and how much intervention the trustees can have, including understanding whether the surplus may be needed to pay benefit improvements or if a payment to a sponsoring company can be made.

In addition to this, LCP said that trustees need to understand the decisions on future plans for the pension scheme and business, emphasising that a key consideration is understanding if an insured buy-out can be achieved with investment returns over time or whether a sponsor contribution is likely to be required.

Given this, it said that detailed analysis, including a review of the buyout position informed by current insurer pricing, and modelling that allows for the impact of members retiring, can often be a "pleasant surprise" for a potential purchaser.

LCP partner, Helen Draper, stated: “The mood music is changing when it comes to pension schemes in transactions.

“Historically, they have been viewed as a liability but as funding levels have increased there has been more focus on how scheme surpluses can be unlocked. This means more scrutiny and understanding of schemes is needed to assess the value of any potential benefit from a surplus.”

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