Scope and Summary
This note provides a practical summary of some key aspects relating to Asset Backed Funding (ABF) for pensions schemes as at July 2021.
ABFs can be attractive options to help address a pension scheme deficit, where an employer has available assets to pledge to the ABF (during the period required under its terms), without needing to commit that asset outright to the scheme. Trustees may also benefit from the security provided by the ABF structure.
Key features include:
- asset backed funding arrangements are designed to make available a non-cash asset towards the funding of a pension scheme;
- when structured appropriately, ABFs can help to successfully balance the needs of the trustee in respect of increased certainty of funding and of the employer in relation to the level of payments into a scheme;
- a key feature for employers is that an ABF can be structured such that all or part of the asset may be returned to the employer on agreed triggers;
- as the ABF structure can have the effect of immediately reducing the scheme deficit, this can reduce the level of cash contributions that would be required otherwise under a recovery plan;
- for trustees, potential benefits may include greater access to security and the prospect of a new income stream (from the secured asset) to help fund benefits compared to the position absent an ABF;
- trustees will need to consider whether an ABF is better in terms of the combination of security and payments to their scheme compared to reliance otherwise on the level of cash payments under a recovery plan;
- ABFs require legal review and documentation to ensure that their terms address the requirements of both employers and trustees. This includes the ability to ensure that there is effective security for the trustees and clear provisions for return of the asset to the employer on the agreed triggers.
Example Structure of ABF
The structure of an ABF requires a number of elements within it including to allow for the joint interest in the LLP between the employer and the trustees and also for the return of the asset to the employer on set triggers. Under statute this involves a Scottish LLP that generally sits within an English law structure.
The asset is acquired from the employer by the LLP (using the one-off contribution which the employer pays to the trustee and the trustee uses to invest in the LLP) and then leased back to the employer by the LLP in return for a regular income stream which is paid to the trustee.
An example of an ABF structure from the Pensions Regulator's (TPR) guidance is as follows:
The Guidance provides that "The regulator recognises that innovative funding mechanisms such as AB[F]s may help employers meet their obligations to schemes and can, in certain circumstances, improve a scheme's security by providing access to valuable assets which were previously out of reach".
ABFs can provide successful outcomes for employers and schemes. As their application and effectiveness are determined by the ABFs legal structure and the nature of the underlying asset, this is an area where detailed advice is key.
We have worked on numerous ABF projects including for Milford Haven Docks, QinetiQ, a department of a leading university and a national medical services supplier. The legal structure of ABFs under statute are part English and part Scottish law and we provide a seamless solution for this through our Bristol, London and Edinburgh offices. Our experience in this area means that we can offer ABF structures to schemes of all sizes on a cost effective basis.