M&A activity over 2024 looks set to regain momentum following a relatively challenging year. WTW’s latest Quarterly M&A Performance Monitor: Q1 2024 – Global M&A endures headwinds with pick up in first quarter deal closures showed a modest rise in completed deals during Q1 2024 compared with the same time last year, however more recent indicators suggest an acceleration in M&A activity in the background over recent months.
The headwinds of 2023 haven’t gone away completely, and so buyers may remain more selective, however, our expectation is that many schemes/scheme sponsors could be touched by some form of M&A or corporate activity during the next 12 months.
Over the past few years, many pension schemes have found themselves in a position where funding levels have improved, and the reliance on the sponsor has greatly reduced. This may have opened the door to previously untenable or costly options. Together with the emergence of new innovations in the defined benefit (DB) market, dealmakers are now presented with a wider array of possibilities to support their goals during M&A than ever before.
Accelerating the journey to buy-out
For many schemes the cost of buy-out may have reduced significantly in recent years. Plus, new alternatives to buy-out have emerged, such as the eagerly anticipated first superfund transaction which was completed last year. This could mean the cost of settling the scheme is, now, more affordable than previously thought.
Would it be more cost effective to carve out the DB scheme from the transaction and remove the related pricing and risk considerations?
Exiting the scheme
For multi-employer schemes, improved funding levels may mean that, currently, the cost (‘Section 75 debt’) for an employer to exit a scheme could now be immaterial in the context of a broader transaction.
Many corporates are considering whether this presents an opportunity to restructure, rationalise or simplify pension arrangements, even if there is no immediate planned M&A.
Re-assessing contingent security
In a world where schemes are better funded and the reliance on sponsoring employers is more limited, previously essential contingent assets or parental guarantees may not have the same value.
Could these potential obstacles to a deal be removed/restructured to allow greater corporate flexibility?
Access to surplus
For some very well-funded schemes, the focus for both acquirers and vendors may switch from a potential downwards pricing adjustment to a more neutral position (or even a potential uplift!).
The outcome of the DWP’s recent consultation on use of surplus, when known, combined with the welcome reduction to the tax rate on refunds of surplus earlier this year, could materially alter the attitude of corporates to DB risks.
Reducing uncertainty
It is no secret that data issues, administration errors and benefit uncertainties may lurk within both DB and defined contribution pension schemes.
Demonstrating steps have been taken to identify and address these risks can remove potential obstacles to corporate transactions, and avoid unwelcome, untimely surprises further down the line.
Training on M&A Readiness
In the UK a scheme trustee is backed by the Pensions Regulator (TPR) who gained new powers in 2021 (see our December 2021 article: New Pensions Regulator powers in the U.K. will impact M&A) to oversee M&A. Whilst the proposed new notifiable events framework hasn’t yet materialised, failing to act in line with TPR’s expectations could still expose those involved in M&A to material risks and, in extreme cases, fines or criminal sanctions.
Training on M&A readiness and TPR’s expectations could be a valuable initial step to help deal teams stay on the right side of the line, should M&A be a possibility in the future.
The considerations outlined above are intended to highlight the range of options that may currently be available, but by no means represent an exhaustive list. If you would like further insights into the available options specific to your situation, please reach out to your WTW consultant or get in touch with WTW’s specialised M&A team.
