Intellectual property is invariably a company’s most valuable asset class, including trademarks, patents, copyright, contracts, databases, brands, reputations, know-how and customer relationships. Two relatively new developments are being used to leverage the value of this IP. The first is mainly used by large corporations which transfer rights in their IP to their occupational pension schemes thereby reducing company guaranteed pension deficits and provide additional security to trustees. The second is more relevant to SMEs and company directors which can sell their IP to their pension scheme for investment finance.

The process of valuing the IP is similar for both schemes. The first step is to identify a suitable bundle of IP assets which collectively enhance and support value. For instance, in order to maintain the value of a trademark (or brand), other assets such as customer contracts, databases, design rights and copyright may also be required. While IP valuations require the involvement of specialists, such as Intangible Business, the methodologies are fairly standard and accepted by regulatory bodies.

For large corporates: using IP to reduce pension deficits
Company pension deficits have never been higher, providing onerous obligations to employers and putting trustees in precarious situations. IP is increasingly being used as a contingent asset due to its ease of transferral, high value and as it is usually covenant free. For example:

• John Lewis contributed shares in Ocado.
• Interserve used PFI contracts.
• ITV used shares in a subsidiary.
• GKN used a mix of assets including its trademark.

The IP is valued and transferred to a special purpose vehicle (SPV) over which the pension fund has rights in event of default. The assets are transferred at lower rates than market value to provide headroom and additional security for trustees. The company continues to use the IP by paying a royalty to the SPV for its use with the rights transferring back to the company once sufficient payments have been made.

There are many benefits of this to both corporates and trustees. For corporates the main advantages are:

• A reduced deficit
• Lower annual cash contributions
• Increased cash flow
• An accelerated tax benefit by providing a large upfront contribution.

For trustees, the key advantages are:

• Increased security by gaining control over a valuable asset they can sell in event of default rather than being left with nothing.
• A company taht is healthier and better able to meet its ongoing obligations. 
• An immediate reduction in the deficit.

For SMEs: using IP to raise finance from pension funds
SMEs often struggle to raise investment finance as banks are unwilling to lend – particularly against IP. Many SMEs have little in the way of tangible assets and these, such as property, will already have finance secured against them. What they do often have is valuable IP.

The directors’ pension scheme – often a SSAS – can be a good source of finance as they are able to acquire and invest in assets and authority can be readily granted. To do so the IP is valued and the pension fund acquires the IP with cash being injected into the company. The company also continues to use the IP under license and royalty payments, which are set at market rate, top up the pension fund.

Innovative schemes such as these provide business with a greater range of options of how to leverage the value inherent in their IP which is usually lying idle.