Bulk annuities help sponsors outperform peers on share prices
Sponsors whose pension schemes complete buy-ins or buyouts tend to outperform their peers by between 0.25% and 3% on average, Mercer research finds.
In two thirds of cases, the share prices of UK-listed corporates grew by a larger amount than other firms in the same sector, according to analysis of over 70 public transactions since 2007.
The consultancy examined share prices one day, one week, one month, three months, and six months after the announcement of transactions - which were largely announced separate to other corporate communications - and compared share price movement to the relevant FTSE Supersector industry index and the FTSE 100 or FTSE All-Share indexes, as appropriate.
Mercer partner and UK leader for bulk pensions insurance advisory David Ellis said: "It's long been a suspicion of many working in this industry that there's probably a beneficial impact but nobody's really set out to try and prove it one way or the other.
"What it shows is that there's pretty good evidence that, even though companies might spend money on these transactions and/or have an arguably detrimental impact on their balance sheet, their share prices are not punished as a result. Either they stay the same, or they go up."
The research should "give confidence to decision-makers and employers", Ellis said, as the evidence shows that their share prices are not going to suffer.
"The market actually values them offloading long-term liabilities where it's right and appropriate."
The share price improved by between 0.25% and 3% on average depending on the timeframe in which the deal's effect was analysed. However, Ellis said the effect could usually be seen within a week of the deal as investors saw the value of the deal.
Mercer said the one-thirds of cases that did not see outperformance of peers were likely impacted by other events, or the amount of money that was put into the scheme to afford the transaction.
Ellis explained: "It depends on the specifics of each case to a degree. How much money do they actually have to put in? What was the market view of the pension plan before? Sometimes, the market has no view of a pension plan; they're just focused on the company's trading activities.
"But there are other cases where they think actually the pension fund's already well-funded and well-resourced, and the sponsor has put more money in to settle it. You could see that, in that very specific scenario, the market might react against it because it does not believe the sponsor needed to spend extra cash at that point in time."
Mercer said it planned to update its analysis as more deals are announced, with the potential to provide more specific data as its sample sizes grew.
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