Asset-backed funding for occupational pension schemes

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By Paul Carney

Readers will be aware that occupational pension schemes providing benefits on a salary-related or defined-benefit (DB) basis — including ‘final salary’ pension schemes — have been in the news for several years.

This is because companies sponsoring such schemes have experienced increasing difficulty funding them. Funding a DB scheme is rooted in the fact that employer contributions to it are open ended: in other words, the employer underwrites the benefits provided under its DB pension scheme.

There are a number of consequences to this, and companies and their advisers have had to find more creative ways of funding DB pension schemes. Possibly the best example of such creativity in the last three to four years is employers’ use of so-called asset-backed funding (ABF) vehicles, with the best known being Diageo’s use, in summer 2010, of an ABF vehicle in which the asset was whisky — approximately 2.5 million barrels of it…

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