In the third of a series of contributed articles, Rosalind Connor, partner of ARC Pensions Law LLP, explores pensions issues in cross-border transactions.
A seasoned M&A expert might feel that nothing could be worse than dealing with pensions on a UK deal. The law is ridiculously complex and counter intuitive. The issues can be politically explosive (as the recent furore over BHS has shown us). Worst of all, not only can they be very costly but no one can give a precise figure of exactly how costly they are, or even (usually) a sensible range.
Like a punchline to a very weak joke, it turns out that the one thing worse than pensions on a domestic deal is pensions on an international deal, with cross border elements. Pensions in all jurisdictions are heavily regulated and politically challenging (the issue of providing security for people’s old age is a live one across the world). Funding issues for pensions are a global problem, particularly as global life expectancy, and their costs, continue to rise.
The fundamental issue for pensions on a cross border deal is how varied pension scheme regulation and delivery is in different jurisdictions. For a start, the trust-based schemes of the UK are inevitably not available in civil law jurisdictions – although contractual trusts arrangements or CTAs were briefly popular in Germany. Other arrangements include third party insurance (often very regulated), enormous industry- or even country-wide arrangements (sometimes Government backed) and even arrangements with no funding outside the business.
Fundamentally, this tends to mean that a purchaser steeped in the pensions culture of one country finds it challenging to understand the structure and the obligations in another. Pension lawyers can all recount tales of trying to explain trust law to French entrepreneurs, or German unfunded arrangements to Dutch businessmen. Even when the structure seems similar, wide gulfs in regulation can be just as challenging.
This causes a particular problem with comparing funding levels and liabilities to the business. The international accounting standard IAS19 is increasingly used to assess pension liabilities globally, but most pensions experts agree it can give a misleading, usually understated, impression of obligations. In practice, it is increasingly common to turn to international actuarial firms to give a genuine assessment of the comparative financial cost of pensions of a global scale.
Once the deal is done, the different structures and regulation stand in the way of harmonisation. Whereas cross border pension arrangements are permitted (and heavily regulated) within the EU, it is in practice incredibly difficult to feed an Austrian unfunded scheme into an insured Norwegian one. In addition, the heavy local regulation may mean that even providing the same level of benefits in different jurisdiction is not permitted, as local collective bargaining arrangements may mandate different levels.
Cross border transactions are rarely halted by pensions – in the context, it is unusual for the pensions to be an overwhelming financial impediment. However, the issues can be complex to deal with. If not anticipated in advance, they are often a significant delaying factor in closing the deal, a cost and complexity, and a thorn in the side of the deal team.