U.K. Pensions Issues on Sales and Acquisitions - Shares or Assets?

Pension liabilities in UK defined benefit (DB) pension plans have increased dramatically in recent years. Liabilities can be measured in many ways, but the ultimate liability is the cost of buying immediate deferred annuities for plan beneficiaries (the "buy-out" cost). This is the most expensive basis of calculating plan liabilities (much greater than the accounting liabilities under FRS17). Termination of a DB plan creates a debt that is immediately due from the plan sponsors on the buy-out basis. The potential financial strain on a business means that termination is no longer a viable option for most businesses.

On sales and acquisitions involving UK companies, pension liabilities have therefore risen to the top of the agenda. This commentary summarises the issues that may arise on a transaction involving a target with a DB pension plan in the UK and, in particular, the relative merits of a sale of the shares as opposed to the assets of the target company.