The pros and cons of using Scottish limited partnerships in funding deals
Friday 16th January 2015
- SLPs have financial advantages for employers funding pension liabilities.
- Trustees are likely to see more proposals using SLPs.
- SLPs are complex structures and require professional advice.
Arrangements using Scottish Limited Partnerships (SLPs), once restricted to the largest pension schemes, are increasingly being proposed for schemes of all sizes. The technical reasons for using the SLP model have been much discussed in other articles. This article looks at why they are becoming more popular and what drawbacks they have.
A funding proposal which includes an SLP will be initiated by the sponsoring employer, usually after advice from its accountants and tax consultants. Trustees receiving such a proposal must consider it carefully and take advice.
Advantages of the SLP
For employers, using an SLP as part of the pension scheme funding arrangements:
- Is an attractive way to maximize the value of business assets which are not needed to secure other obligations. Despite concerns from the Pension Protection Fund earlier this year, there are no restrictions on the type of asset which can be put into an SLP.
- Addresses concerns about contributions getting trapped in the pension scheme. Unlike cash contributions, which generally can only be paid back to an employer when the pension scheme is funded at the full buyout level, the SLP will contain provisions for its dissolution. Dissolving the SLP may, of course, trigger new funding issues.
- Brings tax and accounting advantages and can also improve the employer insolvency score used to calculate the Pension Protection Fund levy (potentially giving a further financial advantage).
For trustees, agreeing to become a limited income partner in an SLP as part of the funding arrangement:
- Improves the trustees’ position on insolvency by giving them a direct interest over assets (and usually the right to be involved in directing how the SLP operates). This contrasts with the standard legal position where trustees are an unsecured creditor on insolvency.
- Gives some certainty over the cash flows into the pension scheme. The income promised as part of the SLP has similar characteristics to the coupon paid on a bond and can be aligned with the pension scheme’s liabilities.
- Provides an opportunity to invest in assets familiar to the trustees. While some of the assets put into SLPs are unusual, such as cheese and whisky, many of the trustees involved in those deals will have understood them better than many complex financial products put forward as investments.
Drawbacks of the SLP
For employers, the SLP model:
- Typically requires a longer term commitment than the cash commitments which are set out on a standard schedule of contributions or recovery plan. The commitment on the schedule of contributions or recovery plan is, of course, not the full picture.
- Ties up business assets which can otherwise be used for alternative financial commitments, such as to secure banking facilities. Businesses should assess whether the proposed assets will be needed for other purposes over the lifetime of the proposed SLP, which may be for a longer period than the mid to long term strategic plan for the business.
- Is unlikely to be an attractive proposition for trustees unless the value and nature of the assets which are being put forward are easily understood.
For trustees, the SLP model:
- Could substitute cash contributions for assets which have a value for the sponsoring business, but no real market value. On an employer insolvency, general retail units and office space should be capable of re-letting (depending on the prevailing market), but realising cash from complex industrial sites and specialist goods or intellectual property may be difficult.
- Increases the exposure to the fortunes of the sponsoring business. Cash contributions allow trustees to invest in a wide range of investment opportunities (albeit with market risks). The SLP model restricts investment choice.
- Requires trustees to understand a complex structure. Professional advice will be needed.
In the next few years funding arrangements involving SLPs are likely to become more commonplace. While many of these will be a positive experience for both employers and trustees, they should be considered carefully. As all involved in the pensions industry know too well, there is no such thing as an odds-on certain investment.
This article was written by Pensions solicitor, Matthew Ambler, for the Pensions Expert.