A reform of Britain's creaking pension schemes has led to radical changes in some M&A deals as bidders have come under pressure to halve the pension deficits at their target companies.
Plans to tighten the rules even further could lead to the failure or abandonment of some bids, dealmakers say.
The UK's new pensions watchdog from April has the power to force companies and their major shareholders to top up pension schemes, some of which have glaring, multi billion-pound holes.
Leveraged buyouts, a popular technique used by private equity firms, have triggered intervention by the watchdog because debt is raised to help finance the acquisition, pushing the pension fund down the pecking order of creditors.
Six months on, bidders are now seeing negotiating stances emerge for the first time over what they have to pay into deficits in order to win approval by the pensions watchdog.
"Fifty per cent (cash) up front and the rest over five years, especially in relation to leveraged buyouts, is a starting place and then you negotiate around that," said Feargus Mitchell, pensions partner at Deloitte, adding that there was no formula, because of the variety of deals.
Mitchell has advised on 15-plus deals post-April, involving pension deficits ranging from £15 million to £400 million. "The regulator certainly wants from a third to a half of the deficit up front," said PricewaterhouseCoopers' pension partner Richard Farr, previously seconded to the regulator. "It depends on a company's leverage - it may want all up front."
Such cash payments were unheard of a year ago. But the changes are a welcome relief for pension scheme members.
Over 90 per cent of the pension schemes at Britain's top 350 companies are in deficit - with an average deficit of £250 million, PwC says. British Airways is a case in point, where the £1.4 billion deficit is more than one-third of the company's market capitalisation.
High profile bankruptcies at companies such as car maker MG Rover, and UK materials firm Turner & Newall (T&N) have thrown a spotlight on the pensions of over 40,000 people.
But the rules are also seeing some M&A deals fail - private equity firm Alchemy Partners has seen pressure on transactions to fill 100 per cent of the deficit.
"It seems filling FRS 17 (the UK pension code) deficits is the basis for most settlements with the regulator, however this is often enough to kill a transaction," said Managing Partner Jon Moulton. And settlements could get tougher - up to now, the UK's so-called FRS 17 code has been the most common measure of deficits, but under new proposals - announced last month - pension trustees may toughen their stance.
"In future I expect trustees to use their own targets, agreed with the employer, which in some cases will give higher deficits than under FRS 17," said Marc Hommel, pensions partner at PwC.
But the new proposals could also relax the focus on up-front cash payments, to focus instead on settlement of the deficit within a maximum of 10 years, said PwC's Farr.
The watchdog says it wants to work with bidders to solve the deficit problem: Last month Ericsson bought the bulk of UK telecoms firm Marconi.
Marconi's pension fund has a deficit somewhere between £109 million and one billion pounds, depending on how it is calculated, and the Ericsson deal saw the pension plan get £185 million cash, and Marconi also set aside £490 million in an escrow account to help meet its future needs.
"The regulator looks at each case on its merits, and would look seriously at any proposal," said a spokesman.