Asset-backed funding of pension schemes continued to grow in 2012 with a material increase expected in 2013, KPMG said.

Its 2012 asset-backed funding survey found that seven of these structures were implemented last year, with a total value of over £500m. The rate of new companies putting asset-backed funding in place has remained at a similar level to previous years, illustrating their continued popularity.

The funding option is increasingly being used by smaller schemes, with the average deficit met falling to around £100m, compared to around £350m over 2009/10 and around £150m over 2010/11.

KPMG predicts a further increase this year, because companies and trustees are under pressure to fund large deficits, and asset-backed funding can be used to finance other goals such as merging pension schemes or facilitating insurance or de-risking. Furthermore, with gilt yields at record lows, many believe deficits are inflated and will return to ‘normal’ levels in future, which has raised fears of trapped surplus in future.

Additionally, a maturing market and clarity on the tax treatment for asset-backed funding will also have a positive effect on growth in 2013.

KPMG UK pensions partner Mike Smedley said: “We now have clarity on the tax treatment and rules for asset-backed funding, which provides certainty and confidence for employers. The market for these structures has matured considerably and simple structures are increasingly cost-effective and accessible for smaller schemes. At the larger end of the market, we expect to see continued innovation to deal with more complex situations. For example we wouldn’t be surprised to see the first asset-backed structure covering pension schemes outside the UK, perhaps in Ireland.”

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