Asset-backed Pension Scheme Contributions Expected to Top £10bn in 5 Years

Michelle Remo, “Big 4″ observer
October 25, 2011 /

Asset-backed financing for pension schemes continues to grow, with contributions of over £5 billion in the last two years, which accounted for around 20 percent of total deficit contributions made, according to the 2011 Asset-backed financing survey from the Pensions team at KPMG in the UK.

Asset-backed financing for pension schemes is where a sponsoring employer uses business assets to generate cash that is then paid to the pension scheme.

KPMG predicted that asset-backed contributions to pension schemes will top £10 billion in the next five years and that potentially up to half of the FTSE 100 could implement it.

The growth is driven by asset-backed financing becoming more mainstream spreading from being the preserve of only larger companies to being adopted by small or medium sized companies and also by a diversification of the type of assets that are being used.

“This type of financing is becoming increasingly popular as businesses battle to reduce their pension deficits. We’ve already seen around £5bn of asset-backed contributions to pension schemes in the past two years and we estimate that this will top £10bn in the next five years,” Mike Smedley, Pensions Partner at KPMG in the UK, said.

According to Smedley, potentially up to half of the FTSE 100 could make asset-backed contributions to their pension schemes.

The growth, Smedley continued, is being driven by asset-backed financing becoming more mainstream.

“When this type of financing first began to be used, it was only really large retailers using their property assets. What we have seen more recently is that many more companies are looking at asset-backed financing to help reduce their pensions liabilities and they are using a much wider range of assets,” Smedley said.

In addition to property, KPMG is now seeing intellectual property such as brands being used and even whisky, although it noted that property does remain the most popular type of asset for use in this type of financing due to its readily available income stream and perceived high level of security for the pension scheme.

An asset-backed funding structure involves a sponsoring employer using business assets to generate cash which is then paid to the pension scheme. This is achieved by transferring the assets into a separate entity such as a special purpose vehicle (SPV) or a partnership.

Typically the assets used will generate income such as rent or royalties although this is not essential while companies are making use of other assets such as brands or income receivables, according to KPMG.

The vehicle then uses the assets to deliver payments to the scheme, which could be a regular income stream and/or lump sums. Typically the entity will be bankruptcy-remote from the sponsoring employer, providing the trustees with additional security if the employer becomes insolvent.

 

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