Helping a not-for-profit organisation with its ABCs

A not-for-profit organisation was becoming progressively more frustrated with its increasing (and increasingly volatile) contribution commitments to its defined benefit pension scheme, both in respect of the future accrual of active members and the repayment of a sizeable deficit.

Following consideration of professional advice, the sponsoring employer proposed the use of an Asset- Backed Contribution (ABC) structure. A large one-off employer contribution was paid into the Scheme, which was subsequently invested in solar farm assets via a Scottish Limited Partnership (SLP). The ABC arrangement entitled the Scheme to receive a stable, inflation-linked income stream for a period of twenty years.

A discounted value of the stream of income was included as an asset of the Scheme within the annual Trustee Report and Accounts, immediately replacing the funding deficit with a surplus.

During the next funding valuation, the Scheme Actuary needed to ensure that the funding decisions reached by the Trustees were in accordance with the relevant guidance. Despite the Scheme being in a surplus position, the ABC arrangement was viewed on an “unpacked” basis whereby the value in the accounts is disregarded and the future payments are treated as a funding stream (effectively a Recovery Plan funded by the ABC arrangement). As such, the issues that trustees typically consider when putting in place a Recovery Plan were also applied to the ABC arrangement e.g. the timing and amount of contributions, likelihood of payments remaining affordable to the ABC arrangement, potential impact of sponsor insolvency and whether the solar park could continue to provide value to the Scheme.

Despite being faced with these additional layers of complexity, the Scheme Actuary was able to implement an efficient, transparent and collaborative process to enable the conclusion of funding decisions within six months of the valuation date on a basis that was favourable to both the Trustees and the Sponsoring Employer.