The Pensions Regulator has urged trustees to examine asset-backed contribution (ABC) structures carefully and explore less risky alternatives to support defined benefit pension schemes.
The watchdog today issued new guidance on ABCs, which involves the transfer of an asset to a 'special purpose vehicle'. The pension scheme then receives part of the income generated by the asset for a specified period.
TPR acknowledged that ABCs could help an employer to fund their scheme and could, in some cases, improve a scheme's security by providing access to valuable assets that were previously out of reach.
But trustees were urged to fully understand the risks, complexity and costs involved, and obtain appropriate advice so that they can make an informed decisions.
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 carefullyevaluate 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.'
Commenting on new guidance, James Atherton, partner at actuaries Lane Clark & Peacock, said the guidance was helpful, but had a 'sting in the tail'.
'These structures are complex and untested in the courts and The Pensions Regulator is concerned that future case law or changes in circumstances - such as Scottish independence - could identify these arrangements as illegal. Expanding on previous guidance, it states that any such structure should include a robust and certain underpin, setting out the payments to be made to the pension scheme should the structure have to be unwound,' he said.
'Crucially, where arrangements have already been put in place without such an underpin, The Pensions Regulator expects trustees to rectify this as soon as possible - so this aspect of the guidance applies retrospectively. This could lead to some challenging discussions between trustees and pension scheme sponsors over the next few months.'
At Deloitte, pensions partner Feargus Mitchell added: 'The Pensions Regulator's updated guidance provides more clarity to the market - clarity that is important when you consider the responsibility trustees have when selecting ABCs to fund the benefits of scheme members.'
He said ABCs were becoming very popular and were increasingly used by smaller schemes to fund deficits of less than £100m. An 'appropriately structured ABC arrangement [could] significantly improve the protection of member benefits, as compared to an unsecured schedule of contributions', Mitchell said.