Given the volatility we have experienced in the financial markets, many would-be acquirers are understandably wary of taking on defined benefit pension plan risk. Taxand USA highlights how this is a risk that no one is eager to take on and that some actively seek to avoid even when the target sponsoring the plan is an attractive asset.
In today’s low discount rate environment and following several rounds of pension funding relief, a divide has grown between the valuation principles that govern the size of the deficit on the balance sheet for accounting purposes and the economic cost of the cash needed to fund that shortfall. As a result, buyers are increasingly looking at alternative measures to determine the valuation of the pension deficits aside from the amounts recorded on the balance sheet.
Our comments here focus largely on the US market, as funding rules differ by country. But in general, this arbitrage opportunity exists in many regions.
Ultimately, we recommend that both buyers and sellers in a transaction consider whether alternative pension valuation methods may be appropriate in order to ensure that the enterprise valuation fully reflects the true economic impact of the plans.