Regulator Says Arrangements Becoming Increasingly Popular

Pension trustees in the UK have been given guidance on using asset-backed contribution (ABC) arrangements to fund pension schemes.

The Pensions Regulator says that an increasing number of defined pension schemes are entering into asset-backed contribution arrangements. As part of its guidance, it has called for trustees to carefully evaluate the risks, complexity and the long-term costs involved in such funding schemes.

An asset-backed contribution structure (ABC) works by allowing a company, which is operating a defined benefit pension scheme, to transfer an asset capable of providing an income stream to a ‘special purpose vehicle’. Part of the financial benefit derived from the asset is then paid via the special purpose vehicle into the pension scheme.

Although the Pensions Regulator acknowledges that innovative funding schemes such as ABCs can improve a scheme’s security by providing access to valuable assets that were previously out of reach, it has highlighted in its report the importance of seeking appropriate advice.

Geoff Cruickshank, the regulator’s interim executive director for DB regulation, said:

"Asset-backed contribution structures can lock schemes into a long-term funding deal, so we expect trustees to carefully evaluate proposals and ask probing questions of their advisers. Trustees should explore whether there are better alternatives which do not expose them to the risks and costs involved in an ABC.

"While an ABC can be given a big upfront value which seems to wipe out a scheme’s deficit, in reality the scheme relies on many years of payments before the value is realised.

"Should the worst happen and the sponsoring company become insolvent, the value of the ABC may be reduced, or even worthless."

Expert Opinion

Irwin Mitchell has recognised the growing popularity of asset-backed contribution (ABC) arrangements. In such an environment, the Pensions Regulator’s guidance for trustees and their advisers in relation to ABCs is to be welcomed as largely helpful and will provide a useful starting point for trustees who are considering proposals of this nature. <br/> <br/>“We believe that, in the right circumstances, ABCs can be mutually beneficial for employers and schemes. The Pensions Regulator also recognises that “innovative funding mechanisms such as ABCs may help employers meet their obligations to schemes”. However, the Pensions Regulator suggests, quite sensibly, that proposed ABC arrangements should be reviewed “critically and carefully”. <br/> <br/>“The guidance focuses mainly on the risks associated with ABCs and the Pensions Regulator’s expectations of trustees in the event that such funding arrangements are proposed. These expectations include detail as to the professional advice which should be obtained by trustees considering a proposed ABC. <br/> <br/>“Irwin Mitchell welcome the Pensions Regulator’s call for trustees to seek appropriate professional advice and would be happy to discuss the potential merits of ABC arrangements with both trustees and employers.” <br/> Nigel Bolton - Partner