tPR has published guidance for trustees to assist them in evaluating whether entry into an asset-backed contribution structure (ABC) would be beneficial for the pension scheme. In summary, an ABC is a contractual arrangement between trustees and a member of the sponsoring employer’s group which involves regular payments to the scheme for the duration of the arrangement, with the payment stream deriving from an underlying asset.
The guidance notes that, in considering any ABC, tPR will generally expect trustees to obtain extensive legal, actuarial, covenant and asset valuation advice and to consider whether there are any viable alternatives to entering into the ABC. Trustees will also need to consider carefully the payment profile under an ABC in the context of managing the scheme's deficit and whether the value of the underlying asset justifies the length of the payment plan proposed. It will also be important for trustees to determine whether they might be giving up any claims, interests or assets on entry into the ABC, whether it could jeopardise negotiation of increased deficit repair contributions in the future and whether it would impair their ability to carry out de-risking exercises.
The guidance also sets out some of the main risks that trustees should consider when entering into such arrangements – for example, potential illegality of the ABC proposed, a weaker underlying asset than anticipated or an inflexible schedule of payments delaying full funding.
tPR notes that it will carry on with its current approach to ABCs and reiterates that entry into an ABC is a decision for the trustees to which it will not give "approval". However, tPR also makes it clear that, where appropriate, it will challenge trustees’ decisions to enter into ABCs, but in a risk-based and proportionate manner. The full guidance can be found here.