Money might burn a hole in your pocket, but a lack of money is burning a bigger hole in companies' pension pockets. How to deal with the black hole in a company pension scheme is a question many company directors and pension fund trustees have been asking themselves, as life expectancy rises and investment returns remain low.
A novel solution
One solution is in the evolving trend of using an injection of non-cash assets to reduce pension fund deficits. These novel structures commonly sit alongside, or can offer an alternative to, a traditional deficit recovery plan. Even companies with active schemes, without pension deficits, may find these structures attractive as they can keep cash in the business. The company transfers non-cash assets to a special purpose partnership in which the pension fund takes an interest. The assets are then leased back in return for regular cash payments, which reduce the pension scheme deficit over an agreed period of time (say 10 to 15 years).
With the value of the injected assets providing an immediate reduction in the deficit, trustees can continue to receive traditional recovery plan payments and target reduction of the full deficit within a shorter period than might otherwise be possible. The assets also offer additional security to the pension scheme in a cash neutral way.
Using your assets
Initially these new structures relied on tangible assets, with companies such as Marks & Spencer and John Lewis contributing property and Diageo contributing maturing whisky. Now we see the use of intangible assets, such as the TUI Travel transfer of its brand rights in Thomson and First Choice. As explained by Mark Catchpole, who led the Stephenson Harwood team advising two of TUI Travel's pension funds,
"Using brand value is a really novel way for TUI Travel to reduce its pensions costs but, importantly, also boost the security of benefits for scheme members. Other companies have started to use property and products to address pension scheme costs, but TUI Travel is the first to use only intangible assets."
None too taxing?
These structures also currently offer companies favourable tax treatment, with tax relief on the initial asset contribution and on the income stream throughout the term of the structure. Watch out though, HMRC is currently consulting on the tax treatment and intends to take steps to remove this double relief.
Other Uniq solutions
Companies and trustees have been finding an increasing number of innovative ways of dealing with deficit issues. One recent example is the restructuring of Uniq plc which included a scheme of arrangement and released Uniq from its pensions debt in exchange for the pension scheme trustee (or the Pension Protection Fund as may be the case), in effect, receiving over 90% of the company's shares. The intention was then to dispose of the shares to realise cash proceeds for the trustee, a proposed transaction on which Stephenson Harwood is advising.
A better bet?
A common concern for trustees is whether the partnership option, or any other proposed structure, provides a better solution than the traditional route. The pensions regulator has recently issued guidance in this area suggesting that trustees should be looking for the structure to provide something demonstrably better than the traditional route, as in ordinary circumstances cash (and cash today rather than tomorrow) is king. Whilst there is certainly something to be said for that, in our experience trustees are willing to explore these innovative options. They can provide extra security and a seat at the negotiating table in the event the business faces financial difficulties. They also free up cash to allow the business to invest and grow, which is good news for the long-term sustainability of the pension scheme.
Trustees do need to take care that they do not fall foul of the rules on employer-related investment. Careful structuring is needed but with good advice and the right circumstances, these structures can be a win/win for both trustees and corporates and are worth a closer look.