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Experts see increasing use of contingent assets as deficits fall

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  • Experts see increasing use of contingent assets as deficits fall

UK – The average deficit within defined benefit (DB) schemes in the UK fell at the end of December, leaving schemes with an aggregate funding ratio of 81.3% for 2012, according to the Pension Protection Fund (PPF).

The 0.5 percentage point funding improvement registered by the PPF 7800 index contrasted with estimates by Mercer that showed funding, at least within FTSE 350 schemes, had worsened over the last month of the year, falling to 89%.

According to the UK's lifeboat scheme, deficits rose to an aggregate of £244.7bn (€299bn), an improvement over the previous December in size and overall funding.

"Over the month, scheme assets rose by 0.2%, and, over the year, there was an increase of 5.9%," the PPF added.

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Discussing the year as a whole, Mercer's UK head of DB risk Ali Tayyebi said the comparative deficit figures for the end of December 2011 and 2012 could give the mistaken impression of a "fairly flat year".

"However, that masks the volatility experienced during the year and the fact that the year has ended with both assets and liabilities at their high point," he said.

"In 2013, we are likely to see a continued focus on schemes developing financial management plans, with particular emphasis on options that can be implemented cost effectively."

He cited the use of contingent assets as one of the approaches companies could employ to help with funding plans.

His assessment was similar to that offered by rival consultancy KPMG, predicting a "bumper year" for asset-backed pension funding.

According to a survey specifically examining the use of asset-backed funding, seven transactions had taken place over the past 12 months valued at £500m in total.

The company's pensions partner Mike Smedley predicted this figure would only increase in the wake of a clarification on tax status offered by Her Majesty's Revenue and Customs.

Smedley said the clarification would offer "certainty and confidence" to employers.

"The market for these structures has matured considerably, and simple structures are increasingly cost-effective and accessible for smaller schemes," he said.

"At the larger end of the market, we expect to see continued innovation to deal with more complex situations. For example, we wouldn't be surprised to see the first asset-backed structure covering pension schemes outside the UK, perhaps in Ireland."

However, LCP has previously cast doubt about the use of contingent assets in Ireland, noting that many pension funds would be unable to obtain guarantees from parent companies.

The company's Martin Haugh, partner in the Dublin office, last year also noted that property would be hard to use for such purposes, as any property-based contingent asset would need to be free of debt.

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