Broadcasting company Wireless Group has signed over its defined benefit pension obligations to broadcaster ITV, under the terms of sale of its television entities to the media giant, showing that defined benefit schemes do not have to be left behind in mergers and acquisitions.
DB pension obligations hit the headlines this week as Tata Steel’s nearly £500m deficit weighed heavily on the British steel industry’s prospects, but the transfer of DB risk is not always a deal breaker for transactions.
In February, Belfast-based media company Wireless Group, formerly UTV media, sold its television business to ITV for £100m, allowing the company to “substantially [improve its] risk profile”.
We’re increasingly getting purchasers who are either trade purchasers, who understand the business, or people who have a good understanding of pensions and their liabilities – and are able to make a much more nuanced assessment of the pension liability and the risks attached
Rosalind Connor, ARC Pensions Law
The transfer of DB obligations was a key part of the group’s risk reduction, according to its preliminary announcement last week.
Ahead of the sale completion, the company reported an IAS 19 surplus of £54,000 at December 2015, a significant improvement from the £2m deficit recorded the previous year, driven principally through a discretionary cash contribution of £1.2m towards the scheme’s actuarial deficit during the year.
Both Wireless Group and ITV declined to comment.
Acquisition trends
Rosalind Connor, partner at law firm Arc Pensions Law, said the transfer of DB obligations between companies was standard protocol 20 years ago, but in the intervening period many businesses have found themselves tackling mounting liabilities.
This has led to a widespread recoil from assuming additional DB burdens, Connor said. “People would even say, ‘I’m only buying this if something is done about the pension scheme before I buy’,” she said, adding that this trend has changed more recently.
“We’re increasingly getting purchasers who are either trade purchasers who understand the business, or people who have a good understanding of pensions and their liabilities and are able to make a much more nuanced assessment of the pension liability and the risks attached,” she said.
Connor said uncertainty over future liabilities continues to hold many companies back, but ITV, which has a £3bn scheme, is “not going to be at any more risk by buying a company with a DB pension scheme”.
Risk assessment
Matthew Harrison, managing director at covenant specialist Lincoln pensions, said that in M&A transactions the disposing business will often retain its DB scheme and liabilities, but a range of structures can arise through negotiations.
The specific treatment of DB schemes in deals typically depends on where liabilities have arisen across a company’s underlying entities, the size of the deficit and the existing pension arrangements of the purchaser, Harrison said.
“The scheme can get split in some way or you can take the whole scheme, which reduces the price for the purchasing business,” he said.
Trustees should carefully consider any features of the transaction that may present risks to the scheme and the security of members’ benefits, he added, alongside the potential for operational synergies with the purchaser’s existing pension arrangements over the longer term.
Price reduction
Phil Jelley, of counsel at law firm Norton Rose Fulbright, said some purchasers “won’t touch a DB scheme”, but those that do take on the obligation will adjust for the additional risk in their offer price.
“If the purchaser is taking on a scheme it will look at the deficit and change the offer price accordingly,” he said, adding that in general, only purchasers with pre-existing DB arrangements would consider taking on a DB liability.
