Knowing your ABCs - Asset Backed Contributions

Pension trustees and employers may feel asset-backed contribution (ABC) arrangements and contingent assets are too complicated and expensive.

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Julia Ridger
Published: 16 Oct 2017 Updated: 13 Jun 2022

Pension trustees and employers may feel asset-backed contribution (ABC) arrangements and contingent assets are too complicated and expensive.

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However, in practice this depends: if immediate deficit reduction within the scheme is sought by the employer, cash preservation is key and the annual Pension Protection Fund (PPF) levy is a burden, both ABC and contingent asset approaches merit consideration. For trustees, the immediate impact of additional funding or the value of a guarantee (and/or additional asset) strengthens the funding position and protects member benefits.

ABC arrangements typically deliver an income stream into pension schemes operating over a 15-25 year period. Contingent assets come in three variants: type A (percent or group company guarantees); type B (security over cash, UK real estate and securities); and type C (letters of credit and bank guarantees).

If entered into correctly, in accordance with PPF requirements, contingent assets can reduce the annual PPF levy and ABCs can be considered, if certified by the scheme trustees. Both will have a positive impact on funding negotiations; in particular, contingent assets give the trustees peace of mind, as additional assets may be called upon to secure member benefits.

It is imperative that the appropriate advisers are in place if either ABC or contingent asset arrangements are entered into - predominantly to ensure efficient project delivery and prevent cost creep. In our experience, advisers may say they can deliver outcomes, but more often than not lack the relevant expertise and tend to price projects at the high end.

Engaging an independent consultant to consider such arrangements, orchestrate and project manage their implementation can add significant value. Consultants can select advisers based on experience, efficiency and value and introduce these to both the trustees and employer.

Significant savings can be made on costs, with suitable advisers potentially executing the project for less than 50% of the costs proposed by incumbent advisers.

Although there is an initial expense in entering into such arrangements, savings will be made over the medium term, funding negotiations may run smoother and trustees will sleep easier knowing that they have secured additional funding or assets to reduce the deficit funding position of their pension scheme.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.