Pension funds are playing a more important role in companies' decisions on whether to proceed with mergers or acquisitions of Europe-based companies, experts say.

Recent cases illustrate the importance of pension plans to prospective deals. There are several steps companies can take to ensure their pension plans' funding levels do not become a hurdle to M&A deals, experts say.

For example, Madrid-based airline Iberia S.A. is considering proposals by London-based British Airways P.L.C. and the trustees of British Airways' two defined benefit pension plans to shore up a combined deficit of £3.7 billion ($5.67 billion) in the plans.

The pension plan deficit has been a potential stumbling block in the airlines' proposed merger.

In late June, British Airways announced it had reached an agreement with the trustees of the two plans under which British Airways—rather than the holding company of the merged airlines—would maintain its current level of annual contributions to the plans plus annual increases of about 3%, in line with inflation. This agreement would wipe out the two plans' deficits by 2023 and 2026, respectively.

This month, specialist U.K life insurer Rothesay Life Ltd., a unit of Goldman Sachs Group Inc., said it would insure part of the liabilities of British Airways' larger defined benefit pension plan.

In addition, Pacific Life Re Ltd., a U.K.-based specialist reinsurer, said it had struck a reinsurance deal to provide Rothesay Life with protection against a proportion of the £1.9 billion ($2.91 billion) longevity risk associated with Rothesay's agreement with British Airways.

Other M&As where pension plans have played a role include the January takeover of Birmingham, England-based chocolate maker Cadbury P.L.C. by Kraft Foods Inc. based in Northfield, Ill. This year, Kraft asked Cadbury staff to accept either a three-year pay freeze or opt out of the company's defined benefit pension plan, which is in the red.

Pension experts would not comment directly on cases such as British Airways and Cadbury, but say the status of pension plans has become a huge factor in companies' decisionmaking process when it comes to M&As.

There are many instances in which planned mergers have not gone ahead because of a perceived problem with pension plan funding, said Marcus Hurd, head of corporate solutions at Aon Consulting in Leeds, England. Often, these failed mergers do not become public knowledge, he said.

While pension plans can appear to be fully funded, an equity market crash could alter that picture very quickly, Mr. Hurd said. Therefore, it is vital for companies interested in M&As to conduct thorough due diligence, he said.

If a proposed merger involves companies from different countries, the parties must ensure they understand the complexities of local laws and the way pensions are treated, Mr. Hurd said.

For example, U.K. pension plan trustees are obligated to look at how a merger would affect plan members and protect their rights. Companies seeking to acquire or merge with others must, therefore, ensure they are fully aware of their obligations and the obligations of parties such as trustees, he said.

Pension plan deficits can be a big problem in M&As, said Stuart Benson, a worldwide partner at Mercer Ltd., a unit of Mercer L.L.C. in Manchester, England.

Recently, the emphasis has shifted from the size of the deficit to the size of the deficit compared with the size of the company, Mr. Benson noted.

While the size of the pension deficit was reflected in the price paid for an acquisition previously, now the longevity, mortality and investment risks also are factored into the price of any deal, he said.

Because there is no internationally agreed way of measuring pension deficits, there is always going to be debate about how it is “priced into” M&As, said Chris Smith, head of the London M&A team at Hewitt Associates Inc.

And the U.K. Pensions Regulator, for example, has fairly strong powers, such as the ability to issue contribution notices, which require companies to contribute a certain amount to their pension plans, about which companies looking to merge with or buy U.K. companies should be aware, Mr. Smith said.

“You need to understand how things work in the country where you are buying” and understand the local rules, he said.

There are creative solutions that companies can employ to mitigate potential problems, such as the use of contingent assets, which means using assets such as property as a sort of guarantee against pension payments, he added.