UK Firms Look To Asset Backed Pension Schemes
Monday, October 31, 2011

Asset-backed financing for pension schemes in the UK continues to grow, now accounting for 20% of total deficit contributions made, according to a new survey from KPMG.

The 2011 Asset-backed financing survey from the Pensions team at KPMG in the UK has revealed that contributions to such schemes could top GBP10bn (USD16bn) in five years. Indeed, these pensions have already received over GBP5bn in "asset-backed" contributions over the past two years.

The scheme involves a sponsoring employer using business assets to generate cash, which is then paid to the pension scheme. Assets are transferred 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 KPMG says this is not essential, noting that it has seen companies making use of other assets such as brands or income receivables.

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.

According to KPMG, the trends it has observed mean that “asset-backed financing” is going mainstream, as more small or medium-sized companies make use of these schemes. There has also been greater diversification of the type of assets that are being used. KPMG expects the growth to continue, predicting that potentially up to half of the FTSE 100 could implement asset-backed financing for their pension schemes.

Mike Smedley, Pensions Partner at KPMG in the UK, commented: "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. In addition to property, we are now seeing intellectual property such as brands being used and even whisky, although 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."