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Jul 15, 2010, 10.06 PM IST | Source: Reuters

Whisky, property, brands to help save UK pensions

Britain's top companies are likely to use big name brands, patents and other exotic assets to help plug shortfalls in pension schemes and fund longer lifespans in the face of lower market returns.

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Britain's top companies are likely to use big name brands, patents and other exotic assets to help plug shortfalls in pension schemes and fund longer lifespans in the face of lower market returns.

Blue-chip firms have hired consultants and are mooting deals with trustees of pension funds to use so-called contingent assets, most commonly real estate, but also intellectual property, brand royalties, trade marks, or any under-used asset.

Diageo caught the attention this month with a deal giving its pension fund up to 2.5 million barrels of maturing Scotch whisky to help tackle its widening deficit.

Similar tactics are being seen elsewhere, allowing FTSE 100 firms to hold on to cash while a rebound in the global economy remains uncertain, hitting investment returns and boosting pension liabilities.

"There is a big increase in the use of contingent assets for pension funding purposes," said Marc Hommel, a partner at consultants PricewaterhouseCoopers, who is advising on transactions involving a wide range of "esoteric assets".

For some banks, that includes non-performing assets such as debt not paid in time, "which are more value to the trustees than to the sponsoring employer," said Hommel.

"A huge amount of companies out there, probably a good percentage of FTSE 100 companies, are working with potential solutions like this," said Mercer consultant John O'Brien.

The need to plug big pension holes is being brought into light by triennial valuations, the hard-nosed number-crunching that habitually throws up far gloomier assessments of the funding position than more benign annual calculations.

A triennial valuation normally uses more conservative criteria, based on investment assumptions using gilts rather than investment grade corporate bonds.

The aggregate pension deficit of the top 200 schemes in the UK was above 100 billion pounds (USD 153.4 billion) at the end of June, according to consultancy Aon.

Scheme trustees are likely to face further deficits exacerbated by lower-than-expected investment returns, and improved longevity. Britain's leading share index, the FTSE 100, is down 6% in the year to date.

Corporate pension schemes known to have hefty pension deficits but which have not yet used contingent assets include telecoms operator BT and the Royal Mail, which have deficits of around 7.6 billion pounds and 8 billion pounds, respectively.

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