Asset-backed funding on the rise as schemes beef up security

An asset-backed funding structure involves a sponsor placing some assets of the business into a separate entity to generate cash for the pension scheme. The scheme retains ownership of that asset and uses the income to pay pensions.

Some of the more esoteric structures created over the past couple of years included using whiskey, cheese and intellectual property to help close the funding gap.

At the National Association of Pension Funds' investment conference last week, delegates heard the number of asset-backed funding structures being completed was rising rapidly. 

“In the course of the last annual period there were 23 more of these structures finished; there were only seven in the year before that,” said David Fripp, pensions partner at consultancy KPMG. “They are growing in popularity.”

“The average size of these structures in the year 2009/2010 was £300m-plus; last year the average size of these structures was £80m," said Fripp. "We’ve seen them done now for as little as £20m-£25m. They’re becoming better understood.”

Asset-backed funding strategies typically use Scottish limited partnerships as a special purpose vehicle to allow schemes to access the assets without breaching restrictions on employer-related investments, which prohibit schemes from investing more than 5 per cent of its assets into its sponsor's business.

This has led to concerns over the viability of such funding strategies in the event of Scottish independence, but experts said they would remain viable. The Financial Reporting Council warned any structures that artificially inflated solvency could be a cause for investigation.

“Every QC who has yet been consulted has concluded that there are at least two layers of protection: the Scottish nature of the limited partnership, and the fact that it is fundamentally a partnership, which keeps us well away from offending employer-related investments,” said Fripp.

“If Scottish independence were to become a reality there’s a possibility that one of the two layers of protection may become compromised, but we’re not too uncomfortable about that; there are two limbs of protection here.”

The Pensions Regulator issued guidance in November relating to the use of asset-backed contributions. It outlined they may be used to improve a scheme's security in certain circumstances, but added: "It is important that trustees consider the risks involved in ABC arrangements as part of their assessment of any proposal, obtaining advice and considering available alternatives as appropriate."

Peter Flanagan, vice-president for pensions at DHL, said: “The teething problems seem to be getting worked through now because the regulator is now giving advice, the FRC is giving advice.

“I think that’s now been worked through. Now if it’s right for a particular company, it’s something even smaller companies could look at doing.”