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Asset-Backed Funding For Pensions

With increasingly growing pension deficits, employers are looking for alternatives to cash contributions for their pension schemes. These asset-backed contribution (ABC) arrangements have been very popular in recent years because they give employers the opportunity to retain and control assets in their business while increasing the security available for their benefit members. ABCs also offer other benefits to the employer as they reduce:

  • the actuarial funding deficit and levies payable to the Pension Protection Fund (PPF);
  • the burdens on the employer for cash payments; and 
  • the risk of overfunding the pension scheme.

The sponsoring employer of a pension scheme transfers group assets into a special purpose vehicle (SPV), which uses those assets to generate an income stream for the pension scheme. We are increasingly seeing intellectual property (IP) transferred to SPVs, often Scottish Limited Partnerships (SLPs). The IP is licenced back to the employer in return for royalty payments to the SPV. The income received by the SPV is used to distribute to the trustees based on pre-arranged agreements. Any surplus payments to the SPV can be returned to the employer.

There are also benefits for using ABC arrangements to the trustees including:

  • a reduction in the actuarial funding deficit and PPF levies;
  • employers are able to invest more into the business which can strengthen the employer covenant;
  • increased security for the members benefits; and
  • the scheme can obtain control of the asset upon a trigger event or if the employer becomes insolvent.

Intangible Business specialises in valuing IP and acts as independent valuer in such schemes, representing the company, trustees or both. An independent valuation is essential to ensure the objectivity of the valuation. Suitable IP includes brands, trademarks, designs, copyright, patents, software, technology and contracts that have value independent from the business. Invariably a combination of intangible assets is required to ensure value is maintained for the pension fund.

Our first role is to define the bundle of connected assets suitable to be placed in a SPV. The valuation is carried out on a fair market value basis and transferred to the SPV allowing for a degree of headroom, furthering the trustees’ security.

Intangible Business has provided valuations for these purposes for companies ranging from SMEs to those in the FTSE 100.

New PPF regulations

Recently the PPF has increased its scrutiny of these ABC arrangements. The PPF is funded, in part by an annual protection levy which is charged to eligible pension scheme’s liabilities and is paid by all eligible pension funds. The levy comprises of two components:

  • a scheme based levy (SBL) which is based on a scheme’s liabilities and is paid by all eligible pension funds; and
  • a risk based levy (RBL) which is based on the probability of a pension scheme making a claim on the PPF and the potential size of the claim. It takes into account the potential underfunding of a scheme which will be assumed by the PPF in the event that the employer becomes insolvent.

In December 2014, the PPF published a revised approach to the treatment of ABC arrangements for the purposes of calculating RBL for 2015/16. The PPF has recognised that the ABC assets which have been securitised within the ABC arrangements are generally utilised within the employing company’s business. As a result the PPF have advised that it is inappropriate to consider the going concern value of ABC arrangements within the value of plan assets for the purpose of the quantification of the RBL.

The PPF have advised that the value attributed to the trustee’s interest in an ABC arrangement will be excluded from the plan assets data which are used for the quantification of the RBL. To get credit for the value of the ABC assets the trustees are required to certify the ABC value and obtain an annual valuation from a qualified valuer.

Intangible Business has been engaged by plan trustees to certify the ABC value of assets and has a thorough understanding of what is required by the PPF.

Example Cases