Not-for-profit healthcare provider Nuffield Health has entered into an asset-backed funding arrangement for its £377.1m defined benefit pension fund, as schemes continue to secure benefits with tangible goods.
ABFs, also known as asset-backed contribution arrangements, provide an income stream to a pension scheme via a special purpose vehicle – usually a Scottish Limited Partnership.
If the employer becomes insolvent… the trustees can effectively get hold of the property, sell the property and take the proceeds
Duncan Buchanan, Hogan Lovells
Pensions legislation limits the amount of investment schemes can make into employer-related assets, but the legal characteristics of an SLP mean it is possible for a pension fund to invest in them without falling foul of these rules.
Bill Jangra, head of pensions at Nuffield Health, said that as part of the triennial funding discussions in 2016, “Nuffield Health took steps to provide the members of Nuffield Health Pension and Life Assurance Scheme with greater member security in the unlikely event of future insolvency”.
He explained that the charity has transferred the freehold of Nuffield Health Oxford hospital to Nuffield Health SLP.
“The ABF provides the scheme with a secured asset should the charity become insolvent,” Jangra said.
“The arrangement also results in the charity having irrevocable cash flow obligations to the scheme and its assets increasing by the same amount.”
At the end of 2016, the charity’s net post-retirement defined benefit liability was £44.6m, compared with £80.3m in 2015.
The pension liability for the ABF due within one year is £0.8m, and £75.9m after one year, according to the charity’s latest annual report and accounts.
Ralph McClelland, partner at law firm Sackers, said: “The main benefit of a contingent asset arrangement of this sort is that it means the trustees have access to a tangible asset, the value of which they can... confirm and will have recourse [to] that asset in the event of insolvency of the sponsoring entity.”
He noted that it may allow trustees to take certain steps in relation to the ongoing funding arrangements between the scheme and the employer.
For example, they might be prepared to accept a longer funding plan and it may also enable the trustees to alter their investment strategy.
“You could see circumstances where, with the benefit of the additional security – the peace of mind that you know you’ve got something valuable you can sell when you need it,” a scheme might be prepared to allocate a bit more of its portfolio to return-seeking assets, which might otherwise feel too risky, McClelland explained.
However, he noted the main purpose of using ABFs is where the employer is looking for the trustees’ cooperation on the funding scheme that is set out in the scheme’s recovery plan.
McClelland said ABFs are becoming more common within the pensions world as funding continues to be a problem.
Implementation obstacles
There are some obstacles that schemes and employers can encounter when attempting to enter into such an arrangement.
One of these is “finding suitable assets to use… you can’t do a funding arrangement unless you’ve got something the trustees can value”, McClelland explained.
He said another obstacle is the “time and effort required in getting robust, properly negotiated legal documents around one of these structures”.
Duncan Buchanan, partner at law firm Hogan Lovells, noted that “there have been some more exotic” assets used over the years.
These include whisky, cheese and loan notes from other entities in the group.
Property continues to be one of the more commonly used assets, however.
“It gives them both an income stream, but – perhaps as important – it gives them security.”
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He added that ABFs tend to be designed for larger schemes, mainly because of the costs of implementation.
“It’s a complicated structure, because of the rules on employer-related investment,” he said.
Buchanan explained that a scheme cannot invest more than 5 per cent of its assets in property occupied by the employer.
This is the reason most ABFs use an SLP, because “by using an SLP... you’re investing in a partnership interest”.
