Pensions no longer seen as ‘no-go’ area in M&A activity, as analysis shows £33bn of pension liabilities changed hands in corporate transactions during 2021

New pension rules should not be a problem for acquirers that take a responsible view of their pension commitments

Analysis by LCP on reported transactions in 2021, shows that £33bn of Defined Benefit (DB) pension liabilities changed hands in major M&A activity. New pension rules have increased the clarity regarding what is expected of buyers when it comes to dealing with pensions in big transactions, which used to be seen as a ‘no-go’ area.

New rules clearly laid down in last year’s Pension Schemes Act and by the Pensions Regulator around how DB pensions should be dealt with in corporate transactions are making the issue less of a ‘headache’ according to LCP. The £33 billion of pensions transacted on in 2021 was 24 times the volume transacted in the previous 12 months. While Covid fears may have been the cause behind a muted 2020, 2021 has still been exceptional by historic standards. In 2015 for instance, there was only £5.5bn of pension liabilities transacted.

While the new rules have provided clarity, changes and innovations in the pensions market are also making pension risks easier to manage. With the DB pension schemes maturing, there is typically a shorter run-off time horizon and schemes are much better funded than in the past. The 2021 year-end figures shows that FTSE100 DB schemes combined have a pension scheme surplus of £60bn.

This year will also see the go-ahead for new ‘Superfunds.’ This new option allows pension trustees to transfer the pension scheme – and all its assets and liabilities – to a new Superfund which takes over responsibility for paying the pensions due to members. This is a very significant development for corporate transactions that involve a pension scheme as it means there is potentially a cost-effective way for acquirers to ensure pension scheme members’ promises are delivered whilst also removing the risk from the corporate balance sheet.

Other highlights from the analysis include:

• During 2021, we found 21 large corporate transactions that completed (corporate deals over £1bn) which involved DB pension schemes. Total DB pension liabilities that transferred were c£32,699m.
• The largest DB pension scheme involved was that of WM Morrison Supermarkets plc (£4.4bn worth of liabilities). This was closely followed by the acquisition of Daily Mail and General Trust plc (and their c£3.0bn liability pension scheme) by Rothermere Continuation Ltd.
• The number of deals, and total pension liabilities transferred, were exceptionally high, and compares to just 3 similarly sized corporate transactions throughout the whole of 2020, with DB pension schemes totalling just c£1,358m.
• The significant increase in M&A activity included key transactions such as Cobham, G4S, Morrisons, RSA and Selfridges as well as London Stock Exchange Group's acquisition of Refinitiv Ltd for £19.7bn.

Alex Waite, Partner and M&A specialist at LCP, commented: “M&A deals can be incredibly complex and for many buyers the prospect of dealing with the technical details of transferring pension liabilities has historically been a headache. However, as 2021 shows, it's now no longer the case that it's a ‘no-go’ area for many buyers. Whilst the new rules do create the need for a more thorough transaction process, for those buyers who want to deal with their future pension commitments responsibly, there are now clear rules for how pensions should be dealt with in transactions.

“Although the pattern of activity through 2022 is difficult to forecast, early signs are that the pace of transactions established in 2021 is being maintained”