Conducting a pension risk transfer could be good for a company's share price, with outperformance of up to 3% over time, research by consultant Mercer indicates.
The firm found that companies that transfer some or all defined benefit obligations to an insurer through a bulk annuity deal or longevity swap on average benefit from a higher share price than others.
Mercer analyzed more than 70 companies that conducted risk transfers. More than half had share prices that outperformed their peer group at several points in time following the announcement.
Overall, about two-thirds of the companies analyzed had share prices that outperformed their peers, while the remaining one-third underperformed. The average relative outperformance was between 0.25% and 3%, depending on how much time had passed since announcement of a deal.
The findings are "perhaps surprising to some commentators, as pension risk transfer often requires cash or negatively impacts the company's balance sheet or profit and loss account," a report on the research said. "However, our analysis shows that, in general, it does not appear to be a hindrance, and there is reasonable evidence that it can actually have a positive impact on the company's market value."
The cumulative value of DB obligations insured between 2006 through 2019 was £155 billion ($194.2 billion), the report said.
Mercer looked at the share price changes of more than 70 public deals for U.K. company-sponsored plans since 2007. Share prices were examined one day, one week, one month, three months and six months after the transaction announcement.
Mercer intends to update the analysis on a regular basis to include new deals.
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June 18, 2020 at 12:04AM
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Insuring liabilities could boost company values - Pensions & Investments
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