Asset Backed Funding Structures (ABFS) are becoming increasingly common as a means of funding final salary pension schemes, many of which are struggling with significant deficit.

In putting an ABFS into place, the benefit of an income generating asset is transferred from the company which sponsors the pension scheme to a special purpose vehicle in which the pension scheme trustee is a limited partner.

To implement an ABFS, you will need:

  • A Scottish limited partnership (‘SLP’) in which the pension scheme trustee and the company act as limited partners.
  • An income producing asset such as a company’s property.
  • A specialist to value the property.

How is it done?

The property is sold by the company to the SLP and leased back to the company for a period of up to 25 years.

The specialist valuer will assess the appropriate market value of the asset and the income stream (rental payments) from it.

The company will then make rental payments for use of the property to the SLP which form the SLP’s profits.

SLP profits will then be distributed amongst the limited partners including the trustee; any excess which could otherwise lead to a pension scheme surplus is likely to be retained by the company limited partner.

Who benefits?

The trustee will receive the majority of the rental payments and usually have the right to take over the property in an event of default. The property is recognised as an asset of the pension scheme and will immediately reduce the funding deficit.

The company benefits from reduced pension scheme contributions and Pension Protection Fund levy payments, possible significant upfront tax relief on the property sold to the SLP and the property will be retained within the corporate group.

Previously the domain of FTSE 100 companies, ABFS’s are now becoming more commonplace as implementation costs fall. Over £3.5 billion of pension deficits have now been funded by ABFSs.

For more information contact Suresh Bhatt or Abdul Salam:

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.