“Just because you have cleared a structure that plugs the deficit that is just accounting, it tells you nothing about improving security. You can plug the deficit with shuffling the deckchairs and I have concerns some trustees have not been as diligent as they should be around these arrangements.”
TPR’s Soper adds the regulator does have concerns about some of the structures. “Just because we have received information about a particular arrangement does not mean we have approved it in any way,” he says. “To understand the risks of these structures, trustees need to carry out proper due diligence and take appropriate advice, including investment advice. This can be expensive, especially for smaller schemes.”
As deficits continue to escalate more schemes and employers will look to ABF to plug them because they are an effective, tax-efficient way of addressing funding issues from day one. But trustees thinking about embarking on a deal need to make sure their lawyers and advisers are on the ball, that they heed TPR’s guidance and they ask themselves several questions: are you comfortable with the asset and how close to that asset are you in the event of insolvency? Is your valuation good and does it still look good in the event of insolvency? In addition, have your lawyers reassured you that you are not breeching ERI regulation? Provided all boxes are ticked, these deals look set to continue.
Contingent assets
People often confuse asset-backed funding (ABF) deals and contingent assets. A contingent asset is when the pension scheme trustees are given a charge over a company asset, which is absorbed into the scheme if the company becomes insolvent. A contingent asset does not offer the same benefit as an ABF because it is not a real asset written into the accounts of the pension fund and the scheme is not better funded straightaway. Also, the asset does not pay a regular cash stream to the scheme like in an ABF deal.
When Dairy Crest sold its French spreads business St Hubert in August 2012 it received £341m in cash from which it made a one-off payment of £40m into the scheme to help address its £67.2m accounting deficit. It also provided the scheme trustee with a floating charge over its maturing cheese as a contingent asset to a maximum realisable value of £60m, which moves to the scheme if the company becomes insolvent.
Dairy Crest corporate affairs director Arthur Reeves explains: “The pension scheme gets more assurance it won’t be in deficit and can pay its liabilities and we the employer get the benefit we retain more cash on our balance sheet to help us fund growth. To pledge £60m and get the banks to do that was not that difficult.”
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