16 May 2013 - Post by:Neil Bowden
Scots will go to the polls in 2014 on the question of independence. I confess I am not neutral in the debate being a Scot living in London (but don’t however have a vote!) but it did get me thinking about what a “yes” would mean for UK pension schemes, and in particular those defined benefit schemes using asset-backed contribution structures as part of their funding arrangements.
There’s been a bit of press recently about schemes with members both north and south of Gretna Green and whether they would become cross border (and therefore be required to be fully funded within 12 months). But what about that increasingly common funding vehicle for schemes, the Scottish Limited Partnership? They are used as mechanisms for pension schemes to hold sponsor assets (commonly property but increasingly more exotic assets such as brands, receivables and even whisky) which deliver secured income flows to schemes with favourable treatment for both tax and scheme funding.
What would happen if the partnership was no longer in the UK? Would it still work? Reassuringly the answer is “yes” but just not as well as it did.
It is worth going back to explain why Scottish Limited Partnerships are used in the first place. The starting point is the restrictions in the Pensions Act 1995 on employer-related investments (ERI) i.e. investments in the sponsor’s business. These are hangovers from Robert Maxwell and his light-fingered way with the pension scheme assets but the principle is clear enough. A pension scheme cannot invest (or at least only to a very limited extent) in the “securities” of its sponsor – or in certain other employer assets (including commercial property used by the sponsor). A scheme could not, for example, own the corporate HQ of its sponsor directly.
Financial services regulations define securities to include shares in a “company”. Company for this purpose means any (a) body corporate (wherever incorporated) and (b) any unincorporated body outside the UK.
A Scottish Limited Partnership rather oddly is an unincorporated body but is (for now) in the UK and therefore isn’t caught. Holding the partnership interest doesn’t therefore cause an issue for a pension scheme under ERI.
By contrast the English equivalents are either body corporates (such as a Limited Liability Partnership) and would be caught by (a) or don’t work for other reasons (such as English Partnerships where the liability of the individual partners is unlimited).
But if the Scots strike off on their own and leave the UK, then the SLP would fall back into the definition of a Company and potentially become subject to the ERI restrictions. However that doesn’t mean everything is lost. There is another reason why SLPs aren’t caught by the restrictions on employer investment. That’s because there is a very good argument that the partnership interest itself is not a “security” at all. In effect there is therefore a fall back line of defence and it still would not fall foul of ERI (there would be just one less reason for that conclusion).
That said, the fall back position would apply equally to an analysis of an English Limited Liability Partnership as a vehicle. So going forward there would be no reason to favour the Scottish flavour of partnership any longer for the extra certainty on ERI. I would therefore expect the current fashionability of SLPs to fade away.
Unless of course board meetings in Edinburgh timed to coincide with the Festival was the key attraction in the first place!
Neil Bowden is a partner at Allen & Overy LLP.