Valuation of pension and similar obligations for the purposes of a corporate transaction

Valuation of pension and similar obligations for the purposes of a corporate transaction


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Speaker(s): Graham Pearce (Mercer Deutschland GmbH)

IFRS or US GAAP is often taken to be a measure of "fair value" of employee benefit related liabilities.

The paper would discuss the valuation of pension and similar obligations, and why the value a buyer or seller may place on a given liability may differ from each other:

  1. Different buyers and sellers in corporate transactions can legitimately place very different values on the same obligations as a result of factors such as the company's cost of capital and the value it places upon risk.
  2. The main internationally recognised accounting standards neither allow for the degree of control that a sponsoring employer retains nor the degree of control that the sponsoring employer has over the pace and nature of funding - both of these can significantly impact the ultimate cost of providing the promised benefits and the risk to the sponsoring employer - or the degree of control the employer has over terminating or amending the plan
  3. The value of options or guarantees can be underestimated due to the deterministic methodology and assumptions used in valuations
  4. The future cost of administering past service accrued liabilities is often ignored
  5. The future cost of mandatory levies (e.g. statutory insolvency insurance contributions such as PBGC premiums in the USA) relating to past service accrued liabilities is often not capitalized
  6. Risk sharing between members and companies is not generally explicitly allowed for in accounting valuations, but can significantly impact the expected cost and long term risk associated with benefit plans
  7. The extent to which benefits vest, and the increases to accrued benefits between the date of leaving service and retirement, can influence the degree to which the liabilities are "debt-like" in nature

Recognising these differences can help actuaries add greater value to their clients in transactional situations.

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