EV/ Equity adjust pensions UK/ Europe

It has been a while since I dealt with this issue. From memory, you do not adjust EV for defined contribution plan, as it does not create a liability / deficit.

Defined benefit (DB), however, is a whole different issue because DB schemes typically run a deficit and can represent a significant future liability.

For modelling purposes, in the UK, you quantify DB pension deficit under FRS 17 and treat this amount as debt. So, your EV needs to include the amount of FRS 17 pension deficit. I am quite certain that companies need to report pension deficit figure under FRS 17 in their accounts. So, if you have an EBITDA of GBP 100m and value the company of 10x, then your equity is GBP 1000m - net debt - FRS 17 pension deficit.

In practice in the UK, if there is a change of control transaction and especially an LBO, your firm will actually need to go and see The Pensions Regulator before closing the deal and agree what amount of the deficit will be funded upfront. It is typically less than the whole of the FRS 17 pension deficit figure. As you can imagine, The Pensions Regulator will be very concerned with high levels of leverage that the LBO might produce, so it is typically a negotiation process between them and the fund.