Markets recognise long-term value of DB de-risking

FTSE350 businesses that de-risked their pension schemes saw an average share price rise of 1.7% compared to an average index fall of 0.2%, analysis finds.

Law firm Freshfields Bruckhaus Deringer said its research proved the markets are "starting to wake up" to the considerable long-term benefits of tackling defined benefit scheme risk.

The City law firm said FTSE350 companies which went through de-risking exercises saw their shares outperform their peers. It added while FTSE350 stocks fell in value by an average 0.2% over the period analysed, companies which de-risked saw their share prices rise by 1.7%.

However, it added market reception was "more mixed" when looking at the wider picture.

Of the 26 deals analysed, 23 were undertaken by FTSE350 companies and three by international corporations with UK subsidiaries. The transactions comprised 15 buy-ins, six buyouts and five longevity swaps.

Freshfields said two-thirds of de-risking transactions undertaken by listed companies with UK pension liabilities actually triggered a fall in the company's share price in the five-day period following the announcement of the transaction.

However, on average they triggered a 1.3% share price increase.

In contrast, it said, traditional moves to tackle pensions scheme liabilities such as closures benefited from a more positive market reception, with shares rising 1.7% on average in the sample analysed.

Partner Charles Magoffin said: "Pensions liabilities are among the most pressing financial issues facing UK businesses. The FTSE350's pensions liabilities alone are estimated to be more than £100bn. Their sheer scale, volatility and seeming intractability is a daunting prospect for many companies."

He added: "Longevity concerns, market volatility and tightening regulation are among the many reasons trustees are taking steps to minimise risk. However, de-risking requires a significant up-front capital investment, so it's not surprising that market reaction has previously been mixed."

Market reception has been move positive in the UK with just under half (48%) of deals resulting in a share price rise. In contrast, 100% of the pensions de-risking deals undertaken by companies listed on international stock exchanges resulted in a share price fall.

Denso, BMW and Pall Corporation saw shares dip -1.6% on average.

While six of the FTSE350's examples (23%) took place ahead of, or during, a significant corporate deal, a clear pattern does not emerge.

London Stock Exchange, which was seeking to buy Canada's TNX Group Inc, saw its shares rise more than 7%. However Cadbury, which was in the middle of a hostile takeover bid by Kraft; British Airways, which was merging with Iberia; and Cable & Wireless, which was at the centre of demerger speculation, all saw shares fall.

Magoffin (pictured) added: "With The Pensions Regulator becoming increasingly interventionist and pension scheme trustees ever more powerful during the M&A process, pension deficits can make or break a corporate transaction. De-risking deals can smooth the way for a corporate transaction to proceed and can make it easier to raise finance.

"Removing deficits from the equation goes a long way to appeasing buyers and trustees get some reassurance that members' benefits will be protected. The markets are sometimes underestimating the role that pensions have to play."

However, he also warned de-risking deals were not a panacea and were technically and legally complex.