Defined Benefit - pension plans are typically DB in nature. Even if, from a balance sheet perspective, they might qualify as DC plans, the employer usually has a secondary liability for the pay-out of benefits.
Defined Contribution - only “pure” DC commitments based on Collective Bargaining Agreements, a new option introduced by the Government recently, would not come with such a secondary pay-out liability mentioned above.
Further Information - in practice, a large variety of plan structures from defined salary or career average to DC oriented plan designs exist. Pension plans are always granted by the employer, but more and more often are co-financed by employees through conversion of part of their salaries. All employees can require their employer to convert a portion of their salary into contributions toward a pension plan.
There are five types of funding vehicles: (1) direct pension commitment, (2) pension commitment via support fund, (3) direct insurance, (4) retirement fund ("Pensionskasse") and (5) pension fund.
In the event that third party pension vehicles are involved, the possibility of continuing these plans post-transaction needs to be reviewed.
If some of the seller's pension plans are multi-employer pension plans, this could cause delay to the transaction, particularly if a group-related pension vehicle is involved which could not be applied to the purchaser.
Furthermore, the costs regarding pension obligations can be subject to discussions: for evaluation purposes in an M&A context, pension liabilities are either considered in the enterprise value or qualified as financial debt that reduces the purchase price. In a legal due diligence exercise, (i) the effectiveness of previous plan restructurings, (ii) the legal compliance of pension plans and any agreements with external service providers as well as (iii) proper inflation adjustments of pension payments should be reviewed.
Whether pension liabilities (automatically) transfer in the course of a transaction depends on the structure of the deal:
- In a share deal, the pension commitments remain with the legal entity which is acquired. The purchaser therefore economically inherits all rights, duties and liabilities towards all active and inactive employees under the pension plan as the new owner of the target company.
- If a business is transferred by way of an asset deal, an automatic transfer of all active employment relationships is triggered under German law and the new owner of the assets will also be liable for past service-related liabilities of the active employees. Pension liabilities attributable to retired employees however legally remain with the seller / old employer. Furthermore, in an asset deal, pension plan-related assets need to be transferred by contract. If no business transfer takes place, no pension liabilities transfer if it is not contractually agreed.