- Asset-backed funding of pension deficits grew by £500m in 2012 with a “material increase” predicted in 2013, finds KPMG survey
Asset-backed funding for pension schemes (where a sponsoring employer uses business assets to generate cash which is then paid to the pension scheme) continued to grow in 2012 with a material increase expected in 2013, according to the 2012 asset-backed funding survey from the Pensions team at KPMG in the UK.
Seven asset-backed funding structures were implemented in 2012, with a total value of over £500m, according to KPMG’s research. The rate of new companies putting asset-backed funding in place has remained at a similar level to previous years, illustrating their continued popularity.
Material growth predicted in 2013
Based on market conditions and current high interest from employers, KPMG predicts a material growth in the volume of these asset-backed funding structures in the next year.
Mike Smedley, Pensions Partner at KPMG in the UK, said: “2013 is looking like it will be a ‘bumper year’ for asset-backed funding in pensions as companies and trustees seek to fund their deficits in the face of difficult market conditions.”
The main drivers for the uplift in asset-backed funding structures predicted by KPMG are:
- Companies and Trustees are under pressure to fund large deficits. The security inherent in asset-backed funding provides comfort for pension schemes which allows cashflows for funding deficits to be spread over a longer period.
- With Gilt yields at record lows, many take the view that deficits are inflated and will revert in future to “normal” levels. This has raised fears of trapped surplus in future if deficits are funded over short periods, which can be mitigated through the use of asset-backed funding.
- The ability to use asset-backed funding to finance other goals such as merging pension schemes or facilitating insurance or de-risking.
Additionally, according to KPMG, a maturing market and clarity on the tax treatment for asset-backed funding are likely to contribute to growth in 2013. Mike Smedley explains:
“We now have clarity on the tax treatment and rules for asset-backed funding, which provides certainty and confidence for employers. The market for these structures has matured considerably and simple structures are increasingly cost-effective and accessible for smaller schemes. At the larger end of the market, we expect to see continued innovation to deal with more complex situations. For example we wouldn’t be surprised to see the first asset-backed structure covering pension schemes outside the UK, perhaps in Ireland.”
Asset-backed funding in 2012
Seven asset-backed funding structures have been implemented in the past year with a total value of over £500m. The rate of new companies putting asset-backed funding in place has remained at a similar level to previous years, illustrating their continued popularity.
Asset backed funding is increasingly being used by smaller schemes, with the average deficit met falling to around £100m (compared to c.£350m over 2009/10 and c.£150m over 2010/11).
However, the complexity of these structures necessitates co-ordinated pensions, accounting and tax advice, meaning that implementation remains the preserve of the large accounting firms, who have advised on all of the structures put in place to date.
As the market for the structures develops and matures the range of entities using asset-backed funding has expanded. 2012 has seen the first structures put in place by a charity, a regulated utility company, and a cooperative.
The use of loan notes backed by assets is also a new innovation and allows assets to be used as security even when they cannot be transferred into the asset-backed funding structure.
What is an asset-backed funding structure?
An asset-backed funding structure involves a sponsoring employer using business assets to generate cash which is then paid to the pension scheme.
This is achieved by transferring the assets into a separate entity such as a special purpose vehicle (SPV) or a partnership. Typically the assets used will generate income such as rent or royalties although this is not essential and we have been seen companies making use of other assets such as brands or income receivables. The vehicle then uses the assets to deliver payments to the scheme, which could be a regular income stream and/or lump sums. Typically the entity will be bankruptcy-remote from the sponsoring employer, providing the trustees with additional security if the employer becomes insolvent.
How does this type of funding improve a scheme’s deficit position?
The table below shows an example of the impact that using asset backing funding had for one organisation relative to a conventional recovery plan.
|
Remaining deficit |
£85m |
£0m |
Immediate improvement in deficit |
|
Annual Contributions |
£11m |
£7m |
Saving £4m p.a. for first 10 years |
|
Payment Term |
10 years |
20 years |
Significantly longer payment plan |
|
Tax relief |
Received as cash is paid |
Upfront tax relief on value of initial contribution |
Initial cashflow saving is significantly increased due to upfront tax relief |
|
Additional Security? |
None |
Assets bankruptcy remote |
Additional security provided to the pension scheme |
|
Estimated PPF Levy |
£42,500 p.a. |
£7,000 p.a. |
|
|
NPV Cost to Company1 |
£78m |
£71m |
Effective saving of £7m for the company (plus PPF levy saving) |
1) Assumes Company’s cost of capital is 7% p.a.
-Ends-
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: margot.cowhig@kpmg.co.uk
KPMG Press Office: 0207 694 8773
About KPMG:
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 12,000 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2012. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 156 countries and have 152,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.
