How do you treat pensions in a carve-out?

Answer

Mechanics

Pensions are often a hot spot in carve-outs because the allocation can be complex. Standard approaches:

Frozen plan at the seller: The existing DBO stays legally with the seller group, employee claims remain unchanged, and no new benefits accrue. The buyer takes over the employees and creates a new DC plan. This is cleaner for the buyer and often preferred.
Pension transfer: A portion of the DBO and plan assets transfers to the buyer. Negotiations cover which employee pensions transfer, how plan assets are allocated, and employee / labor-law approvals.
Hybrid: Active employees transfer to the buyer, while retirees stay with the seller.

Deep diveShow more details

Valuation implication

If a pension transfer occurs, the net pension liability sits with the buyer and goes into the EV-to-equity bridge.
If the plan is frozen at the seller, the buyer is pension-clean and may pay a premium versus pension-burdened targets.
Labor-law risk and employee consent can be material in some jurisdictions.

DD standard

Run a dedicated pension workstream with actuaries and employment-law advisers.

Pitch tip

A frozen-plan structure can save the buyer from assuming, for example, $60m of pension underfunding. That can justify a higher purchase price while leaving the pension burden with the seller.

← PreviousHow does a change in the discount rate affect the DBO and equity?Next →What is the difference between the IAS 19 DBO and the tax-balance-sheet pension provision?

Back to Accounting