When taking over a company or the shares of a company, the acquirer is often confronted with a pension plan of the transferor that he cannot get rid of (just like that) and for which he, as an employer, becomes responsible.
It is, during a due diligence, a must to determine any risks of the pension plan, so that these can be included in the negotiation of the purchase price and the purchase agreement. Case law now shows that the financial loss to the acquirer can be enormous.
As a result, it is increasingly common for pensions to be a real dealbreaker. This article discusses some of the pension risks that can arise in a merger or acquisition. For the readability of this article, this does not distinguish the manner in which the acquisition or merger takes place.
Examples of pension risks in an acquisition or merger
Because the acquirer is confronted with a pension plan for which he is responsible as an employer, it is important to investigate whether there are risks associated with this pension plan and what the financial consequences may be. Listed below are a number of risks that we frequently encounter in our due diligence practice.
Is there a risk that the company to be acquired and its activities fall under the legal obligation of a professional or industry pension fund (Bpf)?
If so, the employer will usually be obliged to join the Bpf, even if the employer already has its own (insured) pension plan. The Bpf will often retroactively recover missed premiums from the employer in question. This can have a substantial financial impact and in our opinion be a real potential dealbreaker.
Of course, it may also be the case that the employer has dispensation from the Bpf because its own pension plan, for example, is at least actuarially equivalent to the pension plan of the Bpf.
Does the employer's pension plan meet all legal requirements?
If not, there is a risk that the pension plan will be fiscally impure, as a result of which all pension entitlements can be taxed at once. What changes must be made to the pension plan to make it "compliant" and what additional costs are involved?
Has the employer fulfilled all past obligations?
This concerns not only the pension premiums owed, but also the pension entitlements granted. In practice, there sometimes appears to be a difference between the allocated pension entitlements and the actual pension entitlements accrued by the employees, as a result of which - in the future - additional premium (subsequent) payments may be necessary.
Has the employer enrolled all employees in the pension plan?
It is important to check whether all employees are registered for the pension plan. In practice, several employees appear to have waived participation while this is not legally possible. In addition, certain (groups of) employees may not be signed up for the pension plan, for example, because they are on-call or work part-time.
There is then a violation of the Equal Treatment Act. A young employee who is not registered and dies can also cause a huge loss if the employer pays for the cash value of the lifelong survivor's pension.
Due to all the changes in the law in recent years, many pension plans have been adjusted. Have the company's employees demonstrably agreed to these changes?
If the employees have not agreed to this, possibly because the employer never asked, a discussion may arise in the future about which pension plan the employees are exactly entitled to. Compensation issues may also be around the corner.
Conclusion
The topic of retirement deserves more attention in a merger or acquisition. Its importance is currently often underestimated. The risks within the transferor's pension plan and the associated financial consequences can be very large and a real dealbreaker. A thorough investigation of these risks is therefore an absolute must, so that they can be included in the determination of the purchase price or guarantee provisions.
