Jack and the pension bean (scheme)-stalk
May 01, 2018
Once upon a time there was an Employer called Jack Plc who was worried about the cash cost of funding its defined benefit pension scheme. Also, Jack’s trustees wanted security from the golden hen (Jack’s parent company) but Jack Plc did not know how to reach up to them.
The next day Jack Plc saw his advisor who gave him three beans each with a letter on . . . ABC.
Jack Plc threw these beans outside in the pile of things to think about.
The next day Jack Plc saw a giant Asset Backed Contribution (“ABC”) scheme-stalk had grown outside its window. This scheme-stalk allowed Jack’s trustees to benefit from the golden hen (parent) security whilst the scheme-stalk could be chopped down at the point of overfunding.
This may read as fairy tale but I have seen a growth in ABC “beanstalks” being used to provide long-term security to pension schemes whilst protecting the employer from the risk of trapped surpluses and reducing the cash cost to the employer.
Recently I helped a US parented group agree a deal with the Trustees of its UK defined benefit pension schemes (“Schemes”) to secure the £130m deficit over the next 15 years using a loan receivable issued by the US parent co (the beanstalk to the golden hen). The loan receivable will be held by a Scottish Limited Partnership. The “magic” of ABC structures are:
- Improved security for the Schemes versus the status quo due to enhanced access to the parent;
- Reduction in Pension Protection Fund levy costs;
- Reduced risk of future trapped surplus in the Schemes;
- Facilitation of enhanced investment in the business today due to longer cash payment period of 15 years to the Schemes; and
- Potential for accelerated tax relief in the UK;
Structures involving parent issued receivables work especially well for Inbounds which sponsor DB pension schemes in the UK. Any income producing assets can be used to provide security in ABCs, including property, maturing whisky, cheese, third party receivables, brands etc.
We are seeing more interest in these structures given expanding pension deficits yet the expectation that gilt yields will continue to rise. Any company that sponsors a DB pension scheme with a deficit can benefit (from an ABC scheme-stalk), no matter the size of the deficit.>