This blog is the fourth in a series of six that will highlight considerations for and the impact of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.
M&A transactions occur regularly and come in a multitude of structures and players. Sometimes they’re simple two-dimensional deals—one buyer, one seller—sometimes they’re multidimensional—multiple buyers and sellers, plus unions, government entities, federal agencies, etc.
Urgency usually is the call of the day. Properly and quickly assessing the deal landscape under a current lens, as well as a forward-looking post-deal lens, can be crucial for the deal to be successful for all involved.
The incidence of defined benefit (DB) pension plans requires separate expertise to be included on the due diligence and post-merger teams. The amount of work involved in this area can usually be quickly assessed by an experienced actuary. It may have little impact on the structure of the deal or it may drive large elements of the deal, significantly impacting the purchase price or killing the deal entirely.
Below are a few elements to consider from the buyer’s perspective and some examples of the impact they can have on the deal:
|Discount Rates||Can vary significantly depending on different viewpoints and market fluctuations.||Can impact annual costs, balance sheet entries, and funded status significantly.|
|Plan Demographics and Demographic Assumptions||Can vary significantly from expectation.
For example, a business might have a pension plan with 10 times the number of plan participants as employees.
Review demographics assumptions used in the valuation compared with experience and critical plan provisions.
|This can impact go-forward policies and plan operating requirements.
Key benefit provisions could be undervalued or not valued at all with significant liability underreporting.
|Auditors||Have varying practices.
For example, some audit teams allow companies to net supplemental employee retirement plan (SERP) liabilities against rabbi trust assets.
|Accounting allowances vary significantly between auditors: acceptable to theirs may not be acceptable to yours.|
|Balance Sheets||Only show net amounts.||Can mask underlying plan size and corporate impact. Even the slightest movement in plan assets or liabilities can dramatically change balance sheet entries.|
|Liabilities||Withdrawal liability.||Can be surprisingly high.|
|Management employment contracts.||Usually trigger additional liabilities with change-in-control.|
|Termination liabilities.||Buyer should be aware that ERISA or GAAP funded status may not be a good measure of the cost to terminate the plan.|
|Unpredictable contingent event benefits (UCEBs) that are due to plant shutdown or layoff.||Buyer should be aware of these provisions and potential impact to cash funding and expense.|
|At-risk status.||Plans with a low enough funded status will require additional cash contributions, special Pension Benefit Guaranty Corporation (PBGC) valuations and reporting, a potential freeze on benefit accruals, and restrictions on some optional forms of payment.|
|Funding||Onboarding underfunded plan.||Can affect entire controlled group executive nonqualified deferred compensation (NQDC) plans and loan covenants.|
|Merging an underfunded plan.||Can trip funding thresholds in combined plan with amplified effects.|
|Synergy-driven plant closings.||Can trigger unsought involvement of federal pension oversight agencies and massive accelerations in cash contribution requirements.|
|Uncertified plan benefits.
|Require additional work and perhaps additional liabilities.|
|Seller may be obligated for continued, post-close contributions.||Who is responsible, especially if agency agreements are in place?|
|Carryover and prefunding balances (credit balances).||Large credit balances may mask upcoming cash contribution requirements.|
|Contribution due dates.
|Can cause surprises. Who pays, who deducts?|
|Plans may have existing agreements with the PBGC.||May require additional contributions.|
|Project plan costs.||Significant changes in cost might emerge in near-future years, impacting economics of deal.|
|Bring significant resource diversions and legal liability.|
|Current audits or investigations by the Internal Revenue Service (IRS), PBGC, or U.S. Department of Labor (DOL).||May impact legal and financial obligations as well as reputational risks.|
|Material claims pending or threatened related to the plans.||Same.|
|Valuations||Negotiated benefit increases or cost-of-living adjustments (COLAs) in collective bargaining agreements (CBAs) might not be fully reflected in valuations.||Liabilities that are due to current contractual agreements may not be reflected in liability disclosures.|
Additional retirement plan considerations include:
• Inventory discovery may lead to undisclosed plans and liabilities
• Carve-outs can spin plans many different ways, affecting future plan/corporate economics
• State of target’s plan administration could bring burdens
• Proper administration support for the pension plans
• In-house pension expertise evaporating on both sides
• Poison pills need valuation and assessment
• Foreign plan issues such as termination indemnities (if any)
• With the elimination of the Internal Revenue Service (IRS) approval process for individually designed qualified retirement plans, it will be important that plan changes going forward do not jeopardize the qualified tax status of the plans, upon random audits from the IRS.
Pension plans can add complexity to a merger or acquisition. It is important to involve an actuary in the process to identify and help mitigate risks.