Simon Daniel from Eversheds Sutherland weighs up the pros and cons of entering a Scottish limited partnership.
Key points
There are certain key things to bear in mind when designing and implementing an asset-backed funding structure using a Scottish limited partnership.
Experience of running SLPs in this context has brought more issues to the fore that will be worth considering at the feasibility stage.
The overall aim is to ensure the vehicle is set up in a way that works efficiently and does not contain any avoidable trip-wires.
The take-up was pretty good too, with regular announcements of new structures being entered into.
In recent times the rate of creation seems to have tailed off somewhat, perhaps as all the schemes and employers who could (and wanted to) proceed have done so. That said, I am aware of a couple of new structures being developed currently.
For those looking to move in the direction of asset-backed funding, and for those who have already done so, the first few years’ experience has brought out issues to consider, not just in creating the structure, but once it is in place – and these are worth adding to the mix when deciding whether to go ahead in the first place.
Asset-backed funding structures certainly have their merits, but they also have their inconveniences. It is important to weigh up what comes after as much as what comes before
Having said this, the fundamental questions for employers and trustees remain. They must ask whether the employer has a suitable asset to transfer into the ownership of the Scottish limited partnership which is capable of generating, in a secure and reliable manner, the income stream the trustees require.
Employers must then ask what the appropriate term is for the arrangement – typical durations are in the 15-25-year range, but is the employer comfortable essentially locking up assets for that length of time, and are the trustees happy to defer funding for that period when they might get it sooner under a recovery plan?
In addition, is the value of the trustees’ partnership interest right in proportion to the size of the scheme? Too high, and concentration risk arises; too low, and the implementation and ongoing running costs will quickly look disproportionate.
If the asset held by the partnership is a mere loan note, trustees must ask whether sufficient security can be granted to satisfy that they are not just accepting an arrangement which is inferior to an ordinary deficit recovery plan.
They must also ask whether everything is being done to ensure the structure is and remains ERI-compliant and the right balance of power is struck in the partnership agreement to avoid being exposed to the partnership's liabilities.
It is important to check, and ensure the trustees are comfortable with, the protections given to them in respect of employer insolvency, asset substitution, asset withdrawal, failure to distribute income and other breaches or defaults.
Look to the future
Asset-backed funding structures certainly have their merits, but they also have their inconveniences. It is important to weigh up what comes after as much as what comes before.
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Experience of running these structures can bring out some additional factors that are worth taking into account when deciding whether to proceed in the first place. One such factor is the legal, actuarial and other advice needed to certify (and re-certify) either the full value of the partnership interest or the distributions from it for Pension Protection Fund levy purposes.
On a related note, employers and trustees should consider finding a pragmatic way of valuing the partnership interest for the purpose of the scheme's report and accounts and actuarial valuations/annual funding updates which, to the extent possible, does not necessitate a full re-revaluation of the assets or income stream.
It is important to make sure the general partner is running the partnership’s affairs properly (paying distributions on time, reporting information to the trustee limited partners and maintaining a sufficient connection with Scotland).
It is also crucial to bear in mind the potential effect of any legal or political developments that could trigger material adverse change clauses in the partnership agreement or might otherwise need dealing with. While certainly not fatal, the outcome of a second Scottish independence referendum is one example.
Simon Daniel is principal associate at law firm Eversheds Sutherland
