Regulator issues asset-backed contribution guidance

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19 Nov 2013

The Pensions Regulator has published new guidance for trustees considering using asset-backed contribution (ABC) arrangements to fund pension schemes.

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The Pensions Regulator has published new guidance for trustees considering using asset-backed contribution (ABC) arrangements to fund pension schemes.

The Pensions Regulator has published new guidance for trustees considering using asset-backed contribution (ABC) arrangements to fund pension schemes.

The regulator said it had produced the guidelines as it had become increasingly aware that ABCs were being “promoted heavily”, resulting in a significant rise in the number of DB schemes entering such arrangements.

An asset-backed contribution structure is a contractual arrangement between a defined benefit pension scheme and the sponsoring employer’s group, under which the employer or another group company agrees to transfer an asset to a ‘special purpose vehicle’. The pension scheme then receives part of the income generated by the asset for a specified period.

ABCs can help an employer to fund their scheme and, in certain circumstances, improve a scheme’s security by providing access to valuable assets that were previously out of reach. According to research by KPMG  from available data on transactions to date, there have been over £6bn worth of assets placed into ABC structures since they were first adopted in the late 2000s.

However, the regulator, which does not provide approval for such arrangements, said it expected trustees considering investing in an ABC to fully understand the risks, complexity and costs involved, and obtain appropriate advice so that they can make an informed decision.

TPR interim executive director for DB regulation Geoff Cruickshank (pictured), said: “Asset-backed contribution structures can lock schemes into a long-term funding deal, so we expect trustees to carefully evaluate proposals and ask probing questions of their advisers. Trustees should explore whether there are better alternatives which do not expose them to the risks and costs involved in an ABC.

“While an ABC can be given a big upfront value which seems to wipe out a scheme’s deficit, in reality the scheme relies on many years of payments before the value is realised. Should the worst happen and the sponsoring company become insolvent, the value of the ABC may be reduced, or even worthless.”

In its November 2010 statement, the regulator highlighted the risk that ABCs could be classed as an Employer-Related Investment (ERI). This has still not been tested by the courts however, so there remains a risk that entry into an ABC could be in breach of ERI restrictions and therefore be illegal, the regulator warned. For this reason the watchdog expects ABCs to include an ‘underpin’ to protect the scheme in the event that the courts find that ABCs are illegal which results in the arrangement falling away.

KPMG’s Pensions Advisory practice, which has advised on over 40 completed or ongoing ABC implementations, welcomed the guidance but said it was too generic in places.

KPMG’s pensions practice partner David Fripp added: “The guidance dispels a number of myths about the Regulator’s views of ABCs and acknowledges that they are becoming more mainstream.  This guidance should help sponsors who are looking to take proposals to scheme trustees.”‎

“There are some areas where we see scope for confusion because the guidance is necessarily generic in nature.  Each ABC can be very different, and the regulator has been unable to capture all of the nuances that may exist, so sponsors will still need to clearly set out the specific benefits of their proposal for trustees to review.”

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