Partner Article

Asset backed financing: the alternative by KPMG

Increasing numbers of businesses are exploring the use of asset-backed financing for their pension scheme.

These are financial structures in which business assets are used to generate cash which is paid to the company’s pension scheme.

There are currently a host of factors which are behind the growing interest in asset financing from both companies and pension scheme trustees:

Firstly, funding pension scheme deficits remains a massive challenge for many businesses at a time when they are looking to conserve cash and strengthen their balance sheets and capital structures.

So a critical advantage is that asset-backed financing avoids injecting cash that could otherwise be invested in the business’ growth and which is a precious resource in such challenging and uncertain economic times.

Additionally, it immediately reduces the pension deficit because the value of the assets can be recorded as a scheme asset. A reduced deficit usually means that the levy the company has to pay to the Pension Protection Fund will be less.

There can also be significant tax advantages, generating an up-front tax credit at a time when many companies are moving back into ‘tax paying’ territory.

Meanwhile trustees are looking for more funding and security so the robust income stream provided over an extended period holds significant appeal.

Typically the assets involved are property, due to its readily available income stream and perceived high level of security for the pension scheme. That said, almost anything that generates income could be considered. We are now seeing a wider range of assets being called upon, from intellectual property, such as brands, to intra-group loans, shares in subsidiaries, bond investments and even whisky.

KPMG’s latest asset-backed financing survey found contributions of over £5bn had been made in the last two years, accounting for around 20 percent of total deficit contributions.

We predict that the popularity of asset-backed contributions to pension schemes will grow strongly, topping £10bn in the next five years as it evolves from being the preserve of only larger companies to being adopted by small or medium sized companies battling to reduce their pension deficits.

Such schemes see assets transfer into a separate entity such as a special purpose vehicle (SPV) or a partnership. 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.

Asset-backed pension scheme financing is by no means a silver bullet – pensions remain a complex and difficult issue for many businesses – but it can be a useful way to help tackle pension deficitsand support a strategy to accelerate the risk reduction process.

This was posted in Bdaily's Members' News section by KPMG .