Superannuation - Be Careful With What You Promise

In any merger or acquisition transaction, it is common for superannuation arrangements to be “glossed over” in the due diligence process. After all, superannuation issues are hardly considered as deal-breakers.

Often the acquirer agrees to continue existing employee arrangements (including superannuation) but the cost of this commitment could prove to be quite significant. By undertaking the appropriate due diligence on the superannuation benefits being provided by the acquired company, the acquirer then may;

• Change their position on the purchase price or merger proposal;
  
• Modify the proposed remuneration terms for employees;
  
• Introduce a new element into the employee communications strategy;
  
• Re-assess the risks being taken on the transaction

The following two real life case studies contrast what can go right and wrong.

Case Study #1

Company X promised to provide superannuation benefits on "no less favourable terms" to the 50 staff joining them under an acquisition deal. Unfortunately, some weeks after the completion of the purchase, Company X discovered that the new employees were in a Defined Benefit Plan – quite different from the Accumulation Fund that Company X had in place for their existing employees.

To salvage the situation, Company X had to provide additional financial consideration to encourage the recently acquired employees to accept a move to an accumulation style benefit. Further, the company had to promise to pay administration costs and insurance premiums in excess of $40,000 per annum. Aside from the additional costs, any desire the company held to align employees' terms and conditions had been compromised.

Case Study #2

In a similar situation to the previous example, an acquisition was going to result in a need to move employees from a Defined Benefit Fund to an Accumulation Fund on terms “no less favourable” than before. The two firms agreed to seek independent advice on the impact the proposed deal would have on the superannuation offering. Analysis revealed the need for some financial considerations to be made along with a specific communications strategy to be implemented.

This approach resulted in the collection of consent forms signed off by each of the affected 112 employees (within a 10 day time frame) with a genuine appreciation that their needs had received appropriate attention and that they had been given access to information and advice.

Conclusion

Due diligence needs to be thoroughly conducted an all aspects of a merger or acquisition. Calling in the experts to conduct the superannuation due diligence need not be time consuming or expensive, and can help you identify those matters that may require further negotiation.

Mike Smith, Director – Corporate Superannuation, Certainty Financial Pty Ltd. Written for Hindal Corporate; Melbourne, Victoria; Ph: (03) 9642 8822; Investment banking and corporate advisory; www.hindal.com.au
First published: 2 August 2004.
Last updated: 10 January 2006.