Employee benefits a key factor in M&As -
15.02.10
With the deal flow in 2008 and 2009 down, there is little doubt that there has been less demand from both clients and corporate finance professionals for
Due Diligence services in relation to Employee Benefits. However, if the start to 2010 is anything to go by, there is clearly going to be much more activity
and therefore a need for advisers and their clients to look at this area.
There are many factors to consider in the acquisition of a company, with numerous items further up the agenda than benefits. Pre acquisition, in the Diligence
stage, there are clearly many areas to look at, not only when there may be a Final Salary scheme involved, but also on any benefit that exists.
Kudos has done many cost audits for clients in the last 18 months, looking at ways of using the existing benefits more effectively, or refining them in certain
ways with the use of some alternatives. This has resulted in savings for many existing and new clients as they have discovered synergies within the benefits or
other vehicles which could be used in what was a very competitive market.
This was a natural area to include in the Diligence process as it makes sense for the acquirer to know in advance what costs are involved and how these will
impact on them going forward. It really applies to any company which is looking at acquiring, but one of the major aims of any M&A transaction is cost synergies,
and benefits is an area that can escape analysis pre transaction. Even post transaction, employers are coming to realise that reviewing what is offered, why and
for how much is really a must, as benefits are a direct cost.
Areas to be looked at include pensions where there is a tendency for employers to either level up all the employees to the highest contribution structure, when
actually looking at the benefit level and comparing it to the market is really the way forward. We see many employers with several schemes acquired through
transactions over the years, and although it is not always possible to rationalise them all, there can be cost savings and communication advantages to any change.
One of the main areas in which there can be major cost savings is Ancillary Benefits, more commonly known as the likes of Death in Service, Spouses Pension,
Income Protection, Private Medical and Personal Sickness and Accident. The budget for this, which is largely uncontrollable as it relies on the underwriting
terms offered by providers unless self insured, can be a large percentage of payroll.
Clearly, a larger group of people may achieve savings by scale. Amalgamating two policies into one should work, but this saving is at a fairly basic level and
there are other far more involved ways to look at cost savings.
For example, over the last few years, often due to claims' experience, the costs for the likes of Private Medical Cover (PMI) have steadily, and in some cases
sharply, risen. The design of these policies may or may not include limits for certain treatments, or an excess, or underwriting, but the point is that once
you get down into the design, there can be some obvious cost savings which really don't require many amendments to the plan or indeed consultation with staff. We
have used Health Cash Plans to great effect over the last couple of years to help with PMI design.
The covers such as Death in Service and Income Protection can be great benefits to provide. If involved in offshore work, then employers will very often have to
run a Personal Accident and Sickness policy as well. There can be many similarities on these types of cover and looking at both in conjunction with each other
can be a very good idea.
Bringing this back to the M&A market, the same principles apply whether it is pre or post transaction. Many finance directors will want to have the complete
picture when looking at an acquisition. If there is a possible major saving on benefits, or the mere fact that they can be operated much more efficiently, thereby
saving time, then that information could prove valuable.
Moving past the transaction, employees on all sides will be looking to management for guidance on what may be happening with their benefits. The recommendation
is always a clear and quick approach to this which should be tackled as soon as possible after completion. Going forward, the use of technology and employee
access to information in these areas has to be the aim of many employers, and cost savings could be used to deliver these sorts of benefits to employer and employee.
*A version of this article by Alan Fergusson, Director - Employee Benefits at Kudos Financial Services, appeared in The Press and Journal's Mergers and
Acquisitions supplement on 15 February, 2010.