Employee Benefits Due Diligence in M&A: Hidden Risks That Could Impact Deal Value

During mergers and acquisitions (M&A), buyers spend significant time reviewing financial accounts, commercial contracts, legal obligations and operational risks.

Yet one critical area is often overlooked: employee benefits due diligence.

Hidden pension liabilities, uninsured employee benefits, healthcare costs and compliance issues can significantly impact deal value long after a transaction completes.

In our experience, employee benefits are frequently reviewed only after completion, when businesses begin to discover the realities of the workforce they have acquired.

At that point, correcting issues can become significantly more expensive, disruptive and time-consuming.

We have seen acquisitions uncover historic pension liabilities, uninsured contractual benefits, outdated trust structures, fragmented healthcare arrangements and compliance concerns that had remained hidden for years.

Employee benefits due diligence is not simply an HR exercise. It is a commercial exercise that can directly influence deal value, employee retention, operational efficiency and long-term integration success.

 

COHIBL Insight: What We Often Find During Employee Benefits Reviews

Most acquirers invest considerable time validating financial assumptions but comparatively little time assessing the employee benefit obligations attached to the workforce they are inheriting.

The irony is that employees often feel the impact of benefit changes long before they understand the legal structure of the transaction itself.

When handled poorly, employee benefits can become a source of uncertainty and risk. When handled correctly, they can become one of the fastest routes to creating value post-acquisition.

 

Pension Liabilities in Mergers and Acquisitions

Understanding What You Are Really Inheriting

Pension due diligence extends far beyond comparing employer contribution rates.

Buyers frequently assume that a workplace pension is relatively straightforward to inherit. In reality, pension arrangements can contain historic liabilities, compliance concerns and administrative errors that may have accumulated over many years.

Key areas that should be reviewed include:

• Scheme design and contribution structures
• Definitions of pensionable pay
• Salary exchange arrangements
• Auto-enrolment compliance
• Legacy executive pension commitments
• Governance and administration processes
• Provider charging structures
• Member outcomes and investment strategy

One common misconception is that pension harmonisation is simply an administrative exercise following completion.

In reality, poorly planned pension consolidation can create employee relations issues, unexpected costs and additional compliance obligations if the existing arrangements are not fully understood before implementation.

COHIBL Case Study: The Seven-Figure Pension Liability Nobody Expected

During an employee benefits review for a property investment and development business employing approximately 150 people, a routine audit identified significant pension contribution discrepancies.

The pension scheme had been administered internally for more than eight years without appropriate governance, oversight or specialist support.

What initially appeared to be a minor administrative issue developed into a potential liability exceeding £1 million once missed contributions, professional costs, legal fees, actuarial work and associated risks were considered.

Rather than allowing the matter to escalate into a formal investigation, we worked proactively with the business, regulators and affected employees.

This involved:

• Identifying and quantifying the issue
• Engaging with The Pensions Regulator
• Calculating impacted contributions
• Conducting employee consultations
• Providing individual guidance to affected employees
• Developing a resolution strategy acceptable to all parties

The eventual outcome reduced the employer’s financial exposure to approximately £100,000, resolved the historic issues and produced a positive outcome for both employees and the business.

COHIBL Insight: The Bigger Pension Risk

Many buyers focus primarily on contribution rates and ongoing pension costs.

Our experience suggests that the bigger risk often lies elsewhere.

The most significant pension liabilities we encounter are rarely caused by scheme design. They are usually caused by administration failures, missed contributions, incorrect calculations and compliance issues that have gone unnoticed for years.

Before considering harmonisation, buyers should establish confidence that the scheme they are inheriting has been administered correctly.

 

Group Risk Benefits and Hidden Employer Obligations

While pensions attract increasing attention during transactions, Group Life Assurance, Group Income Protection and Critical Illness arrangements often receive far less scrutiny.

This can be a costly mistake.

Under TUPE and employment legislation, benefit obligations may continue following acquisition. Buyers therefore need to understand not only what benefits exist, but whether those benefits are adequately insured and capable of being maintained.

Key risks include:

• Employees exceeding insurer free cover limits
• Long-term absentees
• Existing medical conditions
• Outdated trust structures
• Missing trust documentation
• Incorrect beneficiary arrangements
• Gaps in cover during transitions
• Contractual promises unsupported by insurance

The challenge is not simply matching policy wording.

The challenge is ensuring the benefits are deliverable and properly insured.

COHIBL Case Study: £5 Million of Uninsured Exposure

During a review within the logistics sector, newly appointed HR leadership identified contractual life assurance promises that had existed for years.

Seven senior employees had contracts guaranteeing life assurance benefits worth six times salary.

The problem?

No insurance policy existed.

Salaries ranged between £90,000 and £120,000, creating a potential employer liability of between £3.78 million and £5.04 million if those contractual promises ever needed to be met.

The issue had gone unnoticed because the contractual wording had remained in place long after the underlying insurance arrangements had disappeared.

This is exactly the type of hidden liability that can be inherited unknowingly during acquisition activity.

Another Common Group Risk Issue

One of the most frequent assumptions we encounter is that an employer’s existing insurer will automatically accept newly acquired employees into their arrangements.

Unfortunately, it rarely works that neatly.

We regularly identify situations where senior employees exceed insurer free cover limits following salary increases, promotions or ownership changes.

Failing to identify these issues before implementation can create uninsured exposures that only become apparent when a claim is made.

By then, it is far too late.

 

Healthcare Benefits Due Diligence

Hidden Costs Within Legacy Arrangements

Healthcare schemes often represent one of the largest employee benefit costs within a business.

Yet they are frequently among the least reviewed.

One of the first things we review during due diligence is when a healthcare scheme was last tested against the wider market.

Whilst some employers conduct regular reviews, it is not unusual to find arrangements that have been left unchanged for many years. This can lead to inefficient pricing structures, outdated benefits and missed opportunities to improve employee value.

In our experience, it is common to encounter healthcare arrangements that have not been reviewed for several years, particularly following periods of acquisition activity or changes in management responsibility.

On occasion, we have even encountered schemes that have remained with the same provider and structure for over a decade without receiving an independent market review.

Areas requiring review include:

• Claims experience
• Underwriting basis
• Excess structures
• Benefit duplication
• Historic rate increases
• Service quality
• Ongoing treatment considerations

What Buyers Often Get Wrong About PMI

Many organisations believe healthcare costs are driven entirely by insurer pricing.

We see things differently.

The structure of a healthcare programme often has a greater impact on long-term affordability than insurer premiums alone.

The greatest opportunities frequently come from redesigning healthcare arrangements, improving employee engagement and incorporating supporting benefits such as cash plans that help manage claims behaviour.

The objective should not be finding the cheapest policy.

The objective should be creating a sustainable healthcare strategy for the combined workforce.

 

Consolidating the Wider Benefits Ecosystem

One of the first discoveries following many acquisitions is just how fragmented employee benefits can become.

Separate businesses often maintain their own arrangements for:

• Private Medical Insurance
• Group Life Assurance
• Group Income Protection
• Employee Assistance Programmes
• Health Cash Plans
• Dental Benefits
• Wellbeing Services
• Discount Platforms
• Pension Schemes

While each arrangement may appear manageable individually, multiple acquisitions can create a complex web of providers, renewal dates, costs and employee experiences.

COHIBL Case Study: Consolidating 15 Healthcare Schemes

A civil engineering group had expanded through acquisition, resulting in 15 separate healthcare schemes across 15 different businesses.

This created:

• Fifteen renewal dates
• Numerous providers
• Inconsistent benefits
• Significant administration
• Limited purchasing power

Following a full review, we consolidated the arrangements into a single master scheme with separate categories preserving necessary distinctions between employee groups.

The result was:

• One renewal date instead of fifteen
• Improved outpatient benefits
• Reduced excess levels from as much as £1,000 to £100
• Consistent employee experience
• Simplified administration
• Annual savings estimated between £75,000 and £100,000

Perhaps most importantly, employees gained access to a clearer and more consistent healthcare proposition across the group.

 

Harmonisation Is About More Than Compliance

One of the biggest mistakes we see during integrations is treating employee benefits harmonisation purely as a compliance exercise.

Compliance reduces legal risk.  Communication protects retention.  Employees rarely understand the technical detail of a transaction.  What they do understand is uncertainty.

In the absence of clear communication, assumptions and workplace rumours quickly fill the gap.

A Contrarian View

Many employers assume employee dissatisfaction is caused by benefit changes.

Our experience suggests that dissatisfaction is more commonly created by ambiguity.  We have seen employees worry about losing benefits they were never actually losing.

We have also seen organisations improve benefits while still damaging employee sentiment because the changes were poorly communicated.

The lesson is simple.  Communication is not an administrative task.  It is a retention strategy.

 

The COHIBL PTVC Framework

At COHIBL, we believe successful employee benefits integration requires more than simply matching contractual obligations.

It requires helping employees understand, appreciate and engage with their benefits.

Our trademarked PTVC Employee Appreciation Framework supports this through four key principles.

Personal
Address individual concerns and ensure communication is relevant to each employee’s circumstances.

Timely
Communicate early and proactively to avoid uncertainty and misinformation.

Visible
Ensure employees understand both the value and accessibility of their benefits.

Consistent
Create a clear and equitable benefits experience across the combined workforce.

Organisations applying these principles typically see:

• Increased benefit engagement
• Better employee understanding
• Reduced objections to change
• Improved appreciation of benefits
• Stronger retention outcomes

 

Seven Questions Every Buyer Should Ask Before Completion

Before proceeding with an acquisition, we recommend obtaining clear answers to the following:

✅ Are all employee benefits schemes active and fully funded?
✅ Have all premiums and pension contributions been paid?
✅ Are trust arrangements valid and correctly administered?
✅ Have any compliance breaches been identified?
✅ Are any employees above insurer free cover limits?
✅ Are there contractual benefits not supported by insurance arrangements?
✅ When were the benefits last independently reviewed?

If these questions cannot be answered confidently, further investigation is often required before integration begins.

 

Securing Deal Value From Day One

Employee benefits should never be treated as an administrative workstream that begins after acquisition.

When reviewed properly, they can uncover hidden liabilities, identify cost-saving opportunities, reduce operational complexity and protect one of the most valuable assets being acquired: people.

The businesses that achieve the most successful acquisitions recognise that employee benefits are not simply an HR consideration.

They are a deal value consideration.

At COHIBL, we support organisations before, during and after transactions, helping identify employee benefits risks, uncover operational efficiencies and create positive employee experiences throughout the integration process.

If your organisation is considering an acquisition, integrating a newly acquired business or reviewing employee benefit arrangements following a transaction, we’d be pleased to discuss how an independent employee benefits review could help protect deal value and support your long-term objectives.

 

Frequently Asked Questions

What is employee benefits due diligence?
Employee benefits due diligence is the process of reviewing pensions, healthcare benefits, insured benefits and employee benefit obligations during a merger, acquisition or business transaction.

Why is employee benefits due diligence important in M&A?
It can identify hidden liabilities, compliance issues and uninsured obligations that may affect deal value, integration plans and ongoing operating costs.

Can employee benefits create financial liabilities after an acquisition?
Yes. Historic pension issues, uninsured contractual promises and benefit administration errors can create significant financial and regulatory risks after completion.

What employee benefits should be reviewed during an acquisition?
Buyers should review pension schemes, private medical insurance, group life assurance, group income protection, critical illness cover, employee assistance programmes, wellbeing benefits and any contractual benefit commitments.

 

Disclaimer

This article is intended for general information only and does not constitute financial, investment or pension advice. Appropriate professional advice should be obtained before making decisions regarding pension arrangements or employee benefits.