After a difficult period, the economic climate is showing signs of a revival. After years of restructuring, rationalising and saving, the commercial profits are increasing again, as a result of which various companies have built up a 'war chest' in liquid assets. In order to increase the market share and permanently manage the costs as a result of increasing in scale, competitors are often therefore taken over as well. The increasing number of mergers and takeovers confirms this trend.
Mostly, these takeovers and/or mergers take place 'retaining the rights and obligations' of staff members. However, for the additional company pension there are specific points of interest that more often than not are left unobserved during the negotiations.
Especially for pension plans with a fixed performance (objective to be achieved; defined benefit) the question occurs whether or not the pension obligations have been properly financed. Probably there will be no problem on the basis of the current salaries, since Belgian legislation imposes minimum provisions for the career already performed. Since the pension institutions are co-responsible for the correct implementation of the pension legislation, they will therefore also require additional contributions if these minimum financing requirements are not complied with.
However, in the event of a takeover or merger the value of the company has to be evaluated. Within that framework not only is the current situation important, but certainly the future evolutions are as well. In the event that the takeover or merger takes place retaining the seniority of the staff members, each salary increase after takeover or merger in a defined benefit will not only lead to cost increases for the years of service after the merger or takeover, but also to the assumed seniority. Or, in other words, if the same defined benefit pension plan is retained after the takeover or merger, the future cost price will increase faster if the staff members retain their seniority. In concrete terms, this means that the pension obligations in the event of a merger or takeover for the already performed career should not be evaluated on the basis of the current salaries, but with the projected pension salaries. Of course, this will lead to a far greater pension provision that has often not been accrued yet at the pension institution. The deficit in provision is then deducted from the takeover price, or it should be settled before the takeover.
For companies that are quoted on the stock exchange and must keep their accounting in accordance with IAS (European Union) or FAS (USA), this calculation mode of the pension obligations is an annual requirement.
Determining pension obligations based on projected pension salaries means, however, that we should know the future development of salaries. Since no one knows the future for certain, in this a number of assumptions have to be made with regard to future evolutions of salary, inflation, yield, probability of departure, probability of illness, probability of decease, (premature) pension age, ... After all, all these parameters will determine the eventual pension amount and therefore also the necessary provision (e.g. the faster a salary increased, the higher the pension amount will be and the higher the pension provision for the already performed career).
It is self-evident that the future evolution is partially subjective and that therefore the determination of the projection parameters is part of the negotiations surrounding the takeover or merger. However, it cannot be stressed enough that apparently futile changes in these parameters can lead to considerable differences in the pension provisions and therefore also in the valuation of a company.
As soon as the merger or takeover is then completed, a new entity with different staff statutes comes into being. Unless the various company departments operate completely independently from each other without staff mutations between themselves, such differences in staff policy are intolerable in the long term. Uniting the terms of employment will then thrust itself upon the organisation, and the company pension plan is often an important part of that.
In the event of modification of company pension plans, the Belgian legislation provides for strict regulations and procedures. An important obligation when modifying a defined benefit plan is the 'dynamic management'. This means that, even when the defined benefit plan is discontinued, the pension plan will still have to be adjusted annually (meaning: increased) with the final annual salary for the already performed career until the discontinuation. Therefore, this matches exactly with the pension provision that we calculate at the takeover or merger and demonstrates that this provision results from career obligations before the merger or takeover.
In a future newsletter the pension situation after the merger or takeover will be further explored. Namely, which regulations and procedures have to be complied with when modifying the company pension plan.