With choppy times on the equity markets, pension scheme funding positions need innovative solutions. John Illsley looks at UK corporates’ options to use their brands
At the end of August, the UK’s Pension Protection Fund (PPF) reported that 77% of defined benefit pension schemes were in deficit. The aggregate deficit of the schemes in the PPF 7800 index was estimated to have increased to £196bn in September 2011, from £67.3bn at the end of July 2011. With uncertain markets, this problem is likely to be taxing corporate financiers for the foreseeable future.
In recent years, a number of solutions have developed that aim to reduce pension deficits and preserve corporate cash flow by the securitisation of non-cash assets. Companies have created Pension Funding Partnerships (PFPs), transferring assets into special purpose vehicles, which then lease the assets to the company, generating cash for the underfunded scheme.
In March 2010, engineering company GKN set up a PFP backed by £331m of assets, which included trademarks as well as property. And in May this year, TUI Travel announced a ‘ground-breaking’ PFP using its Thomson and First Choice brands as security to fund its £411m pension deficit. The scheme is the first to solely use brands within a PFP, and will see TUI fund its pension schemes to the tune of £16.5m per annum for 15 years to 2026.
This scheme is likely to be the forerunner of a number of PFPs that use brands and other intellectual property (IP). Many companies do not have tangible assets that are suitable or are not being used as bank security. IP is frequently highly valuable, can be separated simply and valued reliably and crucially is often free of existing obligations.Using brands within a PFP allows the sponsoring employer to exploit a previously unleveraged asset.
Securing the support of trustees is critical. They need to assure themselves that the relevant IP assets are recognised and aggregated in case they have to maximise their value in a distress situation. Brands are often complex, comprising more than just a trademark. The brand value may be substantially reduced without related IP such as patents, processes, and customer and supplier contracts. Trustees will also be concerned that the value of the brand and related IP assets may become impaired by future events.
A number of advisers are required to provide actuarial advice, brand valuation, advice on royalty rates, ongoing brand monitoring, tax and accounting advice to set up the schemes and legal guidance to formalise the structure. The company also needs to ensure that the proposed PFP does not contradict existing banking covenants.
There are considerable opportunities for companies with powerful brands and pension deficits to gain from similar schemes. PFPs backed by IP are a compelling solution for both the pension scheme and the sponsoring employer.
John Illsley is a director of Intangible Business, a chartered accountant and former finance director. He specialises in corporate turnarounds.
This article first appeared in Corporate Financier, magazine of the
ICAEW Corporate Finance Faculty
, in November 2011.