News analysis: Schemes are being forced to be more creative in finding assets to back funding, industry experts have said, following deals using brands, intellectual property and whiskey.
Interest from schemes in asset-backed funding has been rising and schemes have been urged to obtain advice on the value of such assets. But they have also been warned against the complexity and cost of this process.
A recent KPMG study reported £700m worth of new ABF transactions since September 2012, which is already more than the £600m in the previous year.
“It’s an idea for its time,” said David Fripp, pensions partner at the consultancy. “We have got large, persistent deficits which are caused by large structural problems in the economy – they need to be funded.
“Businesses are nervous about funding them too quickly because if they over-fund them, they would not be able to get the money back. The ABF structure allows them to respond in a way that is acceptable to trustees, but not over-commit cash and run the risk of a trapped surplus.”
In the early days of ABFs, within the past five years, most of the assets were more straightforward property holdings. Now, schemes that have exhausted easier solutions are starting to look at more complicated vehicles – for instance, intra-group loans are growing in popularity.
“Many businesses who want to execute the planning simply don’t have plain, vanilla property-style assets,” said Fripp.
Marian Elliott, director at Spence & Partners, said: “Over the past two years, we’ve seen everything from cheddar cheese, to whiskey, to brands, trademarks and patents used to fund schemes, alongside more traditional assets such as property and land.”
Lynda Whitney, principal at consultancy Aon Hewitt, was not convinced ABFs will continue to soar as much as KPMG’s survey suggests, because of the complexity and the layers of cost involved.
“Trustees have to think carefully what the value of the assets would be,” she said. It can be costly when trustees need to take more advisers on board to value the company’s offer, she added.
Smaller companies and schemes are taking the plunge in launching ABFs, according to the survey, which showed the average size of the agreements continued to fall. More than half of recent ABFs had a value of £50m or less, with the smallest being £12m.
“As the planning has become better understood, slightly cheaper to execute and more widespread, more and more small schemes and companies are embracing it,” said Fripp.
Funding experts were unanimous that trustees need to get advice. “The more esoteric the asset, the greater the need for specialist valuation advice,” said Elliott.
“Where the value of an asset is linked to the reputation or brand of the company, it is particularly vulnerable to a reduction in value, just at the time when the asset is most needed. In these circumstances it is crucial that the trustees understand how the value might change if something was to happen to the employer.”
