At a time when borrowing continues to be difficult and many businesses seem to have reached the limit on the amount of hard assets that are already pledged as security to banks, the last year or so has seen more companies turning to intellectual property assets as a way of reducing spiralling pension deficits.
Controlling pension scheme deficits continues to be a major challenge for UK companies. Traditionally, companies have sought to reduce their deficits by using straightforward cash contributions and/or contingent asset arrangements to fund their schemes. Over the last few years companies have pledged a widening variety of assets, such as real estate and other tangible assets to their schemes in order to conserve cash. However with an increasingly large proportion of an average UK company's value being typically made up of intangible assets, the increased pledging of a company's intellectual property to a pension scheme is inevitable.
How does this work?
The principle is simple: a company transfers intellectual property to a special purpose vehicle or partnership. Typically the assets will generate royalty income (payable by the corporate sponsor) and this income is used to deliver a pattern of payments to the pension scheme - which can be a mixture of a regular payment stream and/or lump sums. The vehicle is usually bankruptcy remote, thus providing increased security to the trustees on insolvency of the corporate sponsor.
Benefits of using intellectual property
Using intellectual property to plug scheme deficits can be significantly more attractive to both pension scheme trustees and corporate sponsors. The main advantages include:-
- Preservation of cash - the corporate sponsor minimises cash expenditure, and the increased security enables deficit repair costs to be spread over a longer period;
- Deficit reduction - immediate improvement in the scheme's funding position and PPF levies;
- Maintenance of asset control - the intellectual property assets remain in the corporate sponsor's control and reverts to the corporate sponsor at the end of the term;
- Avoids trapped surplus - the structure can include contingencies for cash costs to fall and reduce the risk of trapped surplus;
- Increased security/covenant - higher level of security for pension scheme trustees - the trustees have the benefit of the income stream from a bond-like asset; and
- Tax advantages - an acceleration of corporation tax deductions which can have significant benefit to the corporate sponsor.
In May this year TUI Travel, the tour operator, agreed a deal with the trustees of its pension schemes that used the value of its Thomson and First Choice brands to cut the pension fund's deficit. Similarly GKN, the multinational engineering company headquartered in Redditch has also pledged royalty income from the use of some of its trade marks to plug the deficit in its scheme.
The UK Pensions Regulator has acknowledged the usefulness of these types of arrangements and as more companies find ways to effectively monetise their intellectual property rights many more UK companies may look towards their intangible assets to fund their ailing pension schemes.