The Pensions Regulator has 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.”
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