News analysis: Employers have been told to approach the use of certain contingent asset funding deals with caution, after the Financial Reporting Council said solvency improvements could be cause for investigation.
There has been growing interest in Scottish limited partnerships from employers as a tax-effective way of reducing long-term risk within their scheme.
Barriers to setting up SLPs
The vehicle may not be as tax-efficient as first thought;
The potential cost around setting one up;
Disagreements between the company and trustees – the latter may prefer an alternative method of lowering liabilities.
When an SLP is established, assets owned by the employer are transferred to the vehicle, which the scheme has an interest in. This asset generates an income that is then available to the scheme.
But the FRC has expressed concern that some of these structures are set up to transform a company’s recovery payments into an equity instrument that artificially inflates solvency.
There has been growing interest in Scottish limited partnerships from employers as a tax-effective way of reducing long-term risk within their scheme.
Barriers to setting up SLPs
The vehicle may not be as tax-efficient as first thought;
The potential cost around setting one up;
Disagreements between the company and trustees – the latter may prefer an alternative method of lowering liabilities.
When an SLP is established, assets owned by the employer are transferred to the vehicle, which the scheme has an interest in. This asset generates an income that is then available to the scheme.
But the FRC has expressed concern that some of these structures are set up to transform a company’s recovery payments into an equity instrument that artificially inflates solvency.
A spokesperson for the financial watchdog said it would open an inquiry into a company’s accounts if, after reviewing, the corporate reporting review team questions whether those accounts comply with accounting or reporting requirements.
“We decide if there has been a misstatement [of liabilities] and would ask the company to restate it or put a note saying next year they will review it in the company’s accounts,” the spokesperson added.
A “small but important” group of larger schemes have set up these vehicles, said Catherine McKenna, partner and global head of pensions at law firm Squire Sanders.
McKenna added this may increase as smaller schemes watch the example set by their larger counterparts.
Employers are required to comply with financial reporting and accounting requirements, scheme funding legislation as well as guidance issued by the Pensions Regulator, which can make the vehicle expensive and complex to set up and monitor.
“It’s a novel area and therefore any company establishing one of these arrangements should expect proper scrutiny from the regulatory regimes and its backers,” said McKenna.
Employers also need to remember that the asset is held by the SLP and not by them, said Rosalind Connor, partner in the employer and pensions group at law firm Taylor Wessing.
If they suddenly think it would be a good idea to sell it, they are either unable to do so or will have quite a process to get that done, she added.
The way in which an employer would calculate tax in relation to the income generated by that asset can add another layer of complexity.
“This is another reason why, although Scottish limited partnerships are an exciting idea, [but] they should be approached with caution,” Connor said.
