- Pension schemes have already received over £5 billion of “asset-backed” contributions in the last two years, according to the 2011 Asset-Backed Financing Survey from KPMG
- “Asset-backed financing” is going mainstream: no longer the preserve of the largest companies, as a number of smaller contributions, utilising a wider range of assets are now seen
- Significant growth in asset-backed financing forecast as half of the FTSE 100 could potentially implement it
- KPMG predicts asset-backed contributions to pensions schemes to top £10bn in the next five years
Asset-backed financing for pension schemes (where a sponsoring employer uses business assets to generate cash which is then paid to the pension scheme) continues to grow, with contributions of over £5bn in the last two years, accounting for around 20 percent of total deficit contributions made, according to the 2011 Asset-backed financing survey from the Pensions team at KPMG in the UK.
And the growth is forecast to continue with KPMG predicting that asset-backed contributions to pension schemes will top £10bn in the next five years and that potentially up to half of the FTSE 100 could implement it.
The growth is driven by asset-backed financing becoming more mainstream spreading from being the preserve of only larger companies to being adopted by small or medium sized companies and also by a diversification of the type of assets that are being used.
Mike Smedley, Pensions Partner at KPMG in the UK, commented: “This type of financing is becoming increasingly popular as businesses battle to reduce their pension deficits. We’ve already seen around £5bn of asset-backed contributions to pension schemes in the past two years and we estimate that this will top £10bn in the next five years. Potentially we estimate up to half of the FTSE 100 could make asset-backed contributions to their pension schemes.
“This growth is being driven by asset-backed financing becoming more mainstream. When this type of financing first began to be used, it was only really large retailers using their property assets. What we have seen more recently is that many more companies are looking at asset-backed financing to help reduce their pensions liabilities and they are using a much wider range of assets. In addition to property, we are now seeing intellectual property such as brands being used and even whisky, although property does remain the most popular type of asset for use in this type of financing due to its readily available income stream and perceived high level of security for the pension scheme.”
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.
|
|
Conventional recovery plan |
Asset-backed funding structure |
Comments |
|
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 pensions 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.
The full 2011 KPMG Asset-backed financing survey is available to download and is based on publically available transaction data.
-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 nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 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.
