Record Contingent Asset Use by UK Pension Funds

Pension funds in the UK are using record levels of contingent assets to plug shortfalls inflicted by the economic crisis.

(February 1, 2012)  —  Pension funds’ use of contingent assets has hit record levels over the economic crisis as employers in the United Kingdom search for innovative ways to plug funding gaps.

The number of occasions that sponsoring companies have handed over assets, rather than made extra cash contributions to pension plans, hit 900 for the year measured to the end of March 2012, up from 750 a year earlier, according to the Pension Protection Fund (PPF), which acts as a lifeboat for bankrupt UK companies.

This meant the number of these contingent assets put in place by UK pension funds rose by 20% in 12 months.

John Belgrove, principal at investment consulting firm Aon Hewitt, said recognised contingent assets could range from simple parent company guarantees to complex special purpose vehicles involving company assets like property or even a brand. 

Previously British Airways used aircraft as contingent assets to try and shore up its funding level, while retailer Marks & Spencer also sparked a trend of creating a property partnership by taking control of its parent’s outlets on the high street worth around £500 million.

Belgrove said: “In a market environment of declining gilt yields and weak economic growth, risk assets have been driven down and liabilities have soared so on a buyout basis, the funding gap for pension schemes has never been bigger.”

The PPF said that in December, UK defined benefit schemes had hit their lowest funding ratio since 2006, when it began reporting figures, with an aggregate 79% on a buyout basis. In June 2007, the same schemes enjoyed a 120% funding ratio.

Belgrove said: “There are two main ways to solve a funding gap: better investment returns or higher sponsor contributions. In tough economic times companies are unlikely to welcome demands for additional cash injections to their pension schemes so it is no wonder we are seeing higher levels of recognised contingent asset solutions as a compromise.”

He said reasons for using such vehicles could range widely from the failure of the sponsoring company to make contributions, through to the funding recovery not being in line with expectations or agreed plan.

Belgrove said: “Since March 2011 funding levels have become even worse so we continue to see a trend in pension schemes finding innovative ways to plug the gap albeit there is no silver bullet.”

The figures on contingent assets reported by the PPF were those in place at the end of March 2011. From that time, the organisation changed its guidance to ensure that companies using contingent assets to improve the health of their pension schemes were not penalised in the same way as those using similar vehicles in lieu of paying a supplier when issuing the annual levy to the lifeboat scheme. This had previously been the case.

In December, the PPF said it would allow a broader range of companies to use them to top up their funding level, as long as the move was agreed with trustees.

Belgrove said: “There is another solution to push out recovery periods, but trustees need security, which comes in the form of the sponsor covenant strength which is now monitored much more closely. Where there are reasonable concerns contingent asset solutions fit the bill quite nicely.”

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