Transferring Defined Benefit Pension Plan Liability Issues
Topic 62 explores some of the complexities and issues associated with the valuation and transfer of defined pension plan liabilities in M&A transactions.
- M&A transactions can require the transfer of pension plan liabilities and assets along with the transferred employees.
- The main issues arising in the transfer of pension plan obligations are valuation of the liability transferred and any related assets and the new benefit levels for the transferred employees versus the benefits previously provided.
BUYER'S VALUATION OF PENSION LIABILITY
- In valuation negotiations, buyers—the transferees—utilize valuation methods that result in a high value of the target's pension plan liability, thereby reducing the target's value.
- In the United States, buyers often start negotiations by stating that the plan liabilities for the transferred employees must be valued using financial statement basis valuation methods (per Financial Accounting Standard (FAS) 87) including either the projected benefit obligation method (PBO) or the accumulated benefit obligation method (ABO).
- Financial statement basis liability valuations ABO or PBO are designed to:
- Present a conservative settlement basis liability level where it is not clear whether the plan will be ongoing.
- Require conservative consistency across financial reporting entities, not liability transfer in a deal context.
PROJECTED BENEFIT OBLIGATION BASIS FOR LIABILITY ...