Pressure on fund deficits in 2012
- Pension valuations are showing increased deficits - gilt yields plummeting, flat equity returns – and this in spite of companies paying significant cash contributions since the last valuation.
- Trustees want to see plans to meet these currently increasing deficits
- The Pensions Regulator believes that, with improved corporate earnings and cashflows, companies can afford increased contributions
- Meanwhile sponsors are often looking to retain earnings to strengthen their finances; and they worry that when investment yields rise, pension deficits could disappear rapidly, leading to over-funding and trapped contributions.
What are the alternatives?
There is typically scope for creating a more effective funding plan for all parties. Plans need to be bespoke for each situation, but are likely to select from a range of alternatives:
- Contingent contributions
- Inter-company guarantees - We recently advised on a complex guarantee arrangement which improved security for the scheme. This facilitated a longer recovery plan and avoided a large increase in cash contributions, as well as achieving a PPF levy reduction
- Covenant protections
- Fixed or floating charges
- Transfers of business assets
- Escrow accounts - KPMG client had a modest deficit, but the sponsor was concerned about rapid funding putting the scheme into a substantial “trapped” surplus. We helped design an escrow account with well-defined trigger points, giving the scheme immediate security for the full deficit while still allowing the company to benefit from surplus if conditions improve.
- Asset-backed funding - KPMG’s Central Asset Reserve (“CAR”) Structure
Asset-backed funding can be a solution that meets everyone’s needs, and it can work with a wide range of qualifying assets, tangible and intangible. KPMG’s own structure (the Central Asset Reserve or “CAR”) simultaneously improves security for members and underwrites contributions while helping sponsors manage their cashflow and tax planning. A CAR structure can also reduce PPF levies, manage trapped surplus risk and finance the implementation of pension risk management strategies such as insurance buy-ins.
HMRC’s latest tax rules endorse the CAR structure, and provide helpful clarity to implementing this type of solution.