The Pensions Regulator publishes further guidance on asset-backed arrangements

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New guidance from the Pensions Regulator (TPR) on asset-backed arrangements confers the steps TPR considers trustees should take before entering into such an arrangement. The guidance also sets out what TPR considers are the key risks trustees need to be aware of before entering into such an arrangement.

The main risks are:

  • inflexible schedule of payments delaying full funding
  • weak underlying assets behind the arrangements
  • trustees limited legal right to enforce a claim against the asset
  • masking the scheme’s overall risk profile
  • the risk of a weakened employer covenant
  • the illegality of the structure.

What trustees should do before using an asset-backed arrangement

TPR has commented that trustees should take comprehensive professional advice on the risks of such an arrangement as well as how to properly put one in place. Trustees will need to seek legal, tax, accounting, investment and employer covenant advice. The key issue for the trustees should be to evaluate whether there is a benefit to the scheme in using an asset-backed arrangement instead of a more traditional scheme funding arrangement.

The guidance from TPR is the first significant commentary it has given on asset-backed arrangements. It provides a good deal of detail and highlights areas of concerns and risks, which the trustees should be aware of.

Relatively few arrangements of this sort are currently established. That said, the value of assets involved is substantial, estimated at over £60 billion.

Given the sums involved, it is unlikely that schemes have, or would, enter into such arrangements without first taking comprehensive professional advice. Therefore TPR’s guidance, and recommendations, is stating what is already good practice. However, scheme and professional advisers shall be grateful for the clarity from TPR on its position going forward.