International M&A: The importance of independent actuarial advice and local expertise

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By Dominic Clark | 08 March 2018


Our client is a global IT company. Prior to becoming a client of Milliman, this company acquired an operation in Spain, thereby taking on a local retirement program, with its associated assets and liabilities, including a defined benefit pension obligation.

As part of the acquisition process, an actuary—appointed by the seller—carried out an actuarial valuation of the existing local retirement liability. Due to a relatively close relationship between the two parties, the buyer did not appoint its own independent actuary to advise it during the transaction, instead relying on the seller’s actuarial valuation.

Shortly after the acquisition, the company appointed Milliman to carry out the actuarial valuations for accounting purposes, covering operations in a number of countries.

In Spain, our work soon revealed that the actuarial valuation on which the acquisition had been based could have significantly understated the value of the defined benefit liability, imposing a large and unexpected local funding deficit on the client.


We brought the issue to our client’s attention, liaising both with staff locally and at corporate headquarters in the United States. We explained how actuarial valuations are prepared and performed, and helped the client to understand the ways in which the results of a valuation can be sensitive to the actuary’s chosen assumptions and methodology.

Some sensitivities tend to be common to all actuarial valuations (e.g., discount rates). However, there can also be key assumptions that are sensitive to particular countries and local practices regarding benefit provisions. These require expert local knowledge and experience. For example, in Spain, defined benefit retirement obligations can include integration with the country’s social security pension.

The client asked us to carry out a retrospective actuarial valuation. This was to provide an alternative estimate of the transfer value for its Spanish defined benefit retirement obligation as of the date of the acquisition, drawing on our local knowledge and expertise.

Based on the assumptions and methodology established by Milliman, we estimated that the Projected Benefit Obligation (PBO) as of the date of the acquisition could have been over twice as high as the liability value calculated by the seller’s actuary and used within the deal process.

Our analysis suggested that part of the difference could be due to the discount rate assumption used in the calculations. However, we also noted that the seller’s actuary, who was based outside Spain, may have used a different retirement age assumption to that which local experience might advise.

Due to the way that the defined benefit retirement obligation is structured in Spain, the PBO is especially sensitive to the retirement age assumption. The choice made by the actuary regarding this assumption can therefore affect the results significantly.


We have been supporting our client with the investigation into the issue. Our alternative transfer value for the Spanish defined benefit retirement obligation provides a key input to this process, together with the knowledge and experience of Milliman locally and internationally regarding employee benefits practices.

This case study provides a good example of why expert international actuarial advice can be important for successful merger and acquisition deals around the world, especially where actuarial valuations are sensitive to judgements on key local assumptions and methodology.

In some cases, a company’s retirement liabilities can be of a large scale compared to the size of the company itself and thus can greatly affect the fair value of a company.

Understanding the details of (often complex) benefit structures and setting appropriate actuarial assumptions and methodology are important aspects of the M&A process, given the potential that each has to vary the actuarial valuation of these liabilities.

Companies should seek independent actuarial support wherever possible, and in particular, ensure that this support involves appropriate local knowledge and expertise.