As an alternative to more conventional contingent assets such as parent company guarantees, employers may use asset backed contribution (ABC) arrangements to provide additional funding and security for a pension scheme.
ABCs usually involve establishing a Scottish Limited Partnership structure which receives assets from the employer.
The trustees also have interest in the SLP and receive a regular income stream derived from the SLP’s assets.
Typically the assets used will be real estate but it is possible to use other types of assets such as derivatives.

The LLP will be governed by a legal document called a Partnership Agreement which sets out the provisions for the distribution of profits and capital.
As the trustees are usually only limited partners they will have to ensure that suitable restrictions on the operation of the asset are included in the Agreement.
The Agreement should specify the amount and shape of the income stream payment to the pension scheme.

An essential point for the employer and the trustees is to establish a value for the asset which is contributed to the LLP.
The asset will require to be professionally valued and diligence carried out to establish any hidden liabilities affecting value.

The Pensions Act 1995 contains prohibitions on pension scheme trustees investing in their sponsoring employers or any associated or connected undertaking which could potentially create difficulties in operating ABCs.
A Scottish Limited Partnership structure is generally used to get around these difficulties created by the employment-related investments legislation.
One important reason for using a Scottish Limited Partnership is that such legal entities have a separate legal personality which is not the case with an English partnership where the courts will look through the entity to the underlying assets.

The Pensions Regulator has issued Guidance for Trustees on ABCs which sets out the risks that Trustees should be aware of as well as the steps they should take to mitigate those risks.
The Guidance states that trustees should take advice on the risks of an LLP and the mechanics of establishing an LLP.

Under the Pensions Regulator’s Guidance, trustees should enter into a separate Underpin Agreement when entering into an SLP arrangement to deal with what should happen if there is a change in law which makes the SLP impermissible.
For example, a future event such as Scottish independence could potentially prevent an SLP from operating.
In the event of a change of law provision being triggered trustees may be given a charge over the property which is the subject of the ABC or may be entitled to cash payments from the employer.
Tax legislation
The Finance Act 2012 contains the relevant tax legislation in relation to ABCs.
Under the Act if certain conditions are met there will be an upfront tax deduction on the contribution being made by the employer to the scheme.
This is equivalent to the payments made by the LLP to the Trustees over the lifetime of the LLP.

Trustees have various statutory investment duties in the Pensions Act 1995 as well as duties under trust law.
The Trustees must satisfy themselves that the investment in the ABC is consistent with their investment duties.
In particular they should consider whether the investment is in the best interests of beneficiaries and their duty to diversity scheme assets.
They should take advice from an authorised investment adviser in relation to the ABC investment.