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New guidance on asset-backed contributions published

Ref: PN13-43
Tuesday 19 November 2013

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

Go to the asset-backed contributions guidance.

An asset-backed contribution structure (ABC) is a contractual arrangement between a defined benefit (DB) 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.

The regulator is aware that ABCs are being promoted heavily and has seen a significant rise in the number of DB schemes entering into this type of arrangement. Innovative funding mechanisms such as ABCs may help an employer to fund their scheme and can, in certain circumstances, improve a scheme’s security by providing access to valuable assets that were previously out of reach. However, it is important that trustees considering investing in an ABC fully understand the risks, complexity and costs involved, and obtain appropriate advice so that they can make an informed decision.

Geoff Cruickshank, the regulator’s interim executive director for DB regulation, 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.”

Editor's notes

  1. Whether an ABC presents a risk depends on the scheme’s existing circumstances, the structure of the ABC and the particular assets / payments involved.
  2. Entry into an ABC is a decision for trustees. The regulator does not provide approval of ABC arrangements but expects trustees to carefully evaluate any proposal and ask the right questions of their advisers so that they can make an informed decision.
  3. The establishment of an ABC can involve the transfer of an asset from the sponsoring employer to the arrangement. In some cases, this could have a detrimental effect on the strength of the 'employer covenant' (the employer’s ability to support the pension scheme).
  4. In its November 2010 statement, the regulator highlighted the risk that ABCs could be classed as Employer-Related Investment (ERI). This has not been tested by the courts, so there remains a risk that entry into an ABC could be in breach of ERI restrictions and therefore be illegal.
  5. For this reason the regulator 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.
  6. The Pensions Regulator is the regulator of work-based pension schemes in the UK. We have objectives to: protect members’ benefits; reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; and to maximise employer compliance with automatic enrolment duties.

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