TPR urges trustees to cast a critical eye over ‘ABC’ proposals in its guidance published today.
Asset-backed contribution (‘ABC’) arrangements have been around for a number of years offering pension schemes access to an income stream backed by assets ranging from retail stores to casks of whisky. Initially the preserve of large schemes (eg Marks and Spencer in 2007), ABC arrangements have become increasingly common as the costs of putting them in place have fallen.
TPR’s guidance recognises that ABC arrangements may improve a scheme’s security by providing access to valuable assets which were previously out of reach. However it urges trustees to examine any ABC proposal carefully taking appropriate legal, covenant, asset valuation and actuarial advice to consider key risks:
- Is the effective deficit recovery period longer than trustees would agree to?
- Is there reduced flexibility in future funding discussions?
- Is the asset value linked to the employer’s covenant?
- What is the trustees’ legal ability to enforce their claim on the asset?
- Does capitalising the income stream obscure the actual funding position?
- Would the scheme be disadvantaged if a court finds employer-related investment provisions have been breached?
TPR expects deficits should be removed as quickly as an employer can reasonably afford, regardless of whether cash flows come from ordinary contributions or asset-backed arrangements. Moreover, it expects ABC arrangements to contain an ‘underpin’ to ensure the scheme is not disadvantaged if the ABC arrangement is void due to illegality or a change in the law. Where existing arrangements do not have an underpin, trustees and employers are expected to rectify this retrospectively.
Argyll comment: TPR’s guidance has been a while coming given these structures have been around for a number of years. Nonetheless it is a useful guide for trustees who might be considering one of these arrangements.
ABC structures can be a mutually beneficial way for employers and trustees to provide security for their pension schemes. The benefit from the trustees’ perspective will depend very much on the nature of the underlying asset and in particular whether its value is correlated to the financial health of the employer. The most valuable security is provided where the asset has a value independent of the employer on insolvency. However, even where the value is correlated an ABC structure may still improve the covenant by allowing trustees to access the covenant of the wider corporate group.
There is still a degree of uncertainty around the legal status of ABCs, as the guidance points out – there are untested issues around employer-related investment and these structures most commonly rely on Scottish Limited Partnerships whose status might be affected should Scotland become independent. An underpin that ensures a scheme is not disadvantaged if the structure fails is an essential feature from the trustees’ perspective.
