09 Aug, 2012

The threat of continued low gilt yields, coupled with lower arrangement costs, is prompting pension schemes with liabilities under £100m to look to non-cash assets to fund their defined benefit (DB) liabilities.  Asset-backed funding has typically been the domain of the FTSE100 but FTSE 350 and SME deals are anticipated by the close of 2012 as these companies seek creative alternative strategies.  Although still expensive, if structured correctly, the initial outlay can be offset by future levy reduction bringing the solution within reach of smaller schemes.  Capita Hartshead experts expect increased commoditisation of these types of arrangements in future.


Kenneth Donaldson (pictured), Director of Actuarial Services for Capita Hartshead, commented:  “The cost of arranging asset-backed funding has previously been prohibitive for some organisations but, faced with diverting more cash into their scheme as a result of low gilt yields, this option is now firmly back on the table – particularly as these arrangements are now less costly and more accessible.  The minimum scheme size to make this viable a year or so ago was typically in excess of £150m, now we’re talking to sponsors with scheme sizes under £100m.  We will start to see deals at the smaller end of the market coming through by the end of the year.   


“Low gilt yields are a double whammy for pension schemes as they impact both future funding calculations and investment returns.  Schemes will have to engage with new ways of meeting funding targets to prevent diverting more cash from normal business activities like investing for growth or paying dividends.  We’ve seen companies using assets ranging from whisky to trademarks in order to plug holes in recent years, and interest in these arrangements will be boosted if gilt yields stay low.”


Capita Hartshead urges frank and open-minded dialogue between trustees and scheme sponsors to secure the best outcome for scheme members and their benefits.  


Kenneth Donaldson continued: “Trustees are right to set prudent funding targets but pouring cash into a pension scheme when liquidity is under pressure doesn’t always make sense.  Keeping cash flow healthy is the best outcome for all stakeholders so using assets such as real estate, brand royalties, intellectual property or stock can be a viable alternative.  Asset valuation, structure of arrangements, due diligence and employer covenant strength are all potential deal breakers so special attention to these areas is required to keep negotiations open and member benefits secure.


“Enlightened sponsors will also be assessing their de-risking strategies alongside their funding position.  While market conditions for arrangements such as buyouts are currently suboptimal, early preparation will allow sponsors to get the right kind of deal when things improve.”


About the author

Related Posts

Leave a reply