Use of asset-backed contributions on the rise in small pensions

The use of asset-backed contributions (ABCs) to fund smaller pension scheme deficits is on the rise, according to research by business advisory firm Deloitte.

Its research, Pension funding solutions: the evolving ABC market, found that 80% of ABCs in 2013 were used to fund deficits of less than £100 million, up from 50% in 2010.

It also found that ABCs are being increasingly used to protect against the risk of over-funding pension schemes

ABCs have been traditionally an option only for large pension schemes with contributions as large as £600 million used to fund deficits.

However, the research found that the demand from smaller pension schemes has risen due to increased flexibility and lower implementation costs.

David Robbins (pictured), pensions advisory partner at Deloitte, said: “FTSE 100 pension scheme deficits have shrunk over 2013, but we estimate the aggregate deficit is still close to £100 billion.

“However, this could all be eliminated if gilt yields continue to rise, leaving schemes in surplus. ABCs offer an alternative for organisations that don’t want to pay cash into their pension schemes with no hope of ever seeing it again if a scheme’s fortunes improve.

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“A variety of assets classes are being used in ABCs. Loan notes have become a more popular asset choice, but real estate, stock and intellectual property are also used.

“Wider understanding and greater flexibility of ABCs has helped make the structures more accessible to smaller schemes. Only half of the implementations in 2010 were to fund deficits of less than £100 million. This figure has increased to more than 80% in 2013 and I expect this trend to continue.”