UK - UK pension funds considering property to plug their pension gaps are looking at overly complex structures to do it, according to research by consultancy Punter Southall on the recent Whitbread property partnership.

Under the terms of the Whitbread deal, the hotel and restaurant group siphoned income from its property assets to plug £100m (€115.6m) of its £434m pension deficit.

The structure involved a special-purpose vehicle arranged by Deloitte that left the parent group in control of the assets, but provided the pension scheme with income from them.

However, for most sponsoring companies, the property-partnership model will prove either unfeasible because it lacks suitable assets, or cost-prohibitive, Punter Southall said.

For companies like Whitbread with a significant property portfolio, the report said, using a sub-set of the properties to reduce the immediate cash demand from the pension fund "might be a good solution" because it allows them to use their balance-sheet assets more effectively.

Lorant Porkolab, co-author of the consultancy's report, suggested schemes often underestimated "the niceties of this type of structure" - and that there were "less complex" alternatives to a special-vehicle model.

"Pensioners might not have suitable assets," he said. "The assets might not be available - the size of the assets might not be right.

"If you look at these the existing examples, they're large companies with significant property portfolios.

"I could imagine smaller companies and smaller schemes doing the same thing, but it has cost implications because it's at the far end of the complexity spectrum."

Legal, tax and accounting implications contribute to this complexity, he said.

In addition, the pension scheme needs to re-evaluate its investment-principles documentation, and the sponsoring company has to ensure banking and credit agreements are not breached by a special-vehicle solution.

In the Whitbread deal, the property partnership is not recognised as plan assets and will therefore not reduce the pension deficit in its consolidated accounts.

In fact, Porkolab suggested, it might prove more lucrative to hold onto assets that could be "significantly more valuable" in the future than they are now.

"Even for companies with suitable assets available, using properties to enhance the pension scheme's security can also prove to be an expensive currency in the current economic climate," he said in his report.

"The value of commercial property has not recovered lately to the same extent as the other asset classes and appears to still be depressed.

"Rental growth is also expected to increase now during a period of high inflation expectations, which, combined with a fall in new and re-developed property, is likely to result in future increases of property value."
 

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