Deficits in defined benefit pension plans will continue to be an issue in 2013. Persistently low interest rates and volatile capital markets, along with changing accounting standards, result in ongoing difficulty for sponsors of these plans. That, in turn, affects both potential purchasers and financiers. Purchasers and lenders need to review carefully the financial position of the target company's pension plans and the target's current and future legal obligations under those plans, and determine the impact of those obligations on the value of the enterprise.
Canadian companies which offer a pension plan to their employees are regulated under pension benefits standards legislation. This legislation imposes strict funding requirements on a pension plan and provides a limited time over which employers can fund plan deficits. Combined with a tough economic climate, these rules have led to many underfunded defined benefit pension plans in Canada. Even the small fraction of pension plans that are fully funded are under pressure, and there is no guarantee that they will remain fully funded. Potential purchasers want to avoid or contain this liability since it can lead to onerous financial obligations.
There are ways to structure an M&A transaction through a share or asset purchase that can specifically address, and potentially avoid, pension plan liabilities. See here for more details on these types of arrangements and on this topic.
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