Asset-backed funding is an arrangement between trustees and the pension scheme’s sponsor to make regular contributions that are backed by an asset for the duration of the agreement. Trustees may benefit from greater security and for sponsors, it can help them meet their pension deficits, while preserving cash within their business. It also reduces the risk of cash being trapped in the scheme should a surplus arise in the future as conditions begin to revert to more “normal” historic levels.
The report revealed that 12 new asset-backed contributions (ABCs) were announced in 2014, totalling £1.24bn. While this is fewer than in 2013 when 21 new exercises totalling £2bn were announced, it demonstrated a continued interest in asset-backed funding as a solution.
The reduction has been driven by improvements in market conditions during late 2013 and early 2014, reducing funding deficits and in-turn easing the pressure on trustees to demand increased contributions from sponsors. Furthermore, the Pensions Regulator’s revised Code of Practice and regulatory policy for funding defined benefit pension schemes has eased pressure on companies to fund deficits uncomfortably quickly.
However KPMG predicts that 2015 will be set for a surge in ABCs, returning to 2013 volumes, as schemes seek to respond to record low level of gilt yields, which will produce sizeable funding deficits.
David Fripp, pensions partner at KPMG said, “This year we expect to see surge in ABCs, returning to the peaks we saw in 2013, not only in response to a low gilt yields environment, but also to support wider changes, such as scheme mergers or significant de-risking.
“It was also interesting to note that while ABCs volumes reduced last year, other alternative funding solutions such as escrow accounts and in-specie asset transfers increased last year, resulting from schemes focusing on the risk of trapped surpluses.”
The report also revealed that while property and intra-group loans were the most popular assets, more imaginative use of assets such as the company’s brand and liquid natural gas (LNG) ships were also used.
David concluded, “Cash funding remains the most common approach to tackling deficits. However the alternatives explored in our report can provide greater flexibility in allowing companies to preserve cash that may be better used in the business or reduce the risk that cash becomes trapped in the pension scheme.
“No one solution will be right for all schemes and companies must carefully consider their options based on their circumstances. While asset-backed funding offers a number of advantages, there are a number of alternatives which may also be suitable.”
Simon Chan, PR Assistant Manager, KPMG
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.