• Pension fund deficits jump 75% in a month to £117.5billion

Companies are expected to increase the use of their intellectual property ('IP') dramatically in order to plug deficits in their pension funds, say Wedlake Bell LLP, the City law firm, at their well-attended seminar held in London this week (13 September ) held jointly with BNP Paribas.

Over the last few years companies have pledged a widening variety of assets, such as real estate, to their pension schemes in order to reduce their funds' deficits without having to inject cash.

However Wedlake Bell say that, with an increasingly large proportion of an average company's value being typically made up of intangible assets, the increased pledging of a company's IP to a pension scheme is inevitable.

For example, in May this year TUI Travel, the tour operator, agreed a deal with the trustees of its pensions schemes that used the value of its Thomson and First Choice brands to cut the pension fund's deficit.

GKN has also pledged the royalty income from the use of some its trade marks to plug the deficit in its scheme.

Companies have been pledging real estate and other tangible assets as part of their efforts to plug pension fund deficits. But there is a limit to the amount of hard assets owned by businesses that are not already pledged as security to their banks.

Comments Clive Weber, Head of Wedlake Bell's Pensions Team, who chaired the seminar: "The modern company's value is increasingly tied up in its patents, trade marks, designs, copyright and software, and in income from licences."

"Pension fund trustees will need to get used to accepting these kinds of assets as part of deficit reduction plans. The scale of pension fund deficits is now so great that we can't realistically expect the deficits to be filled by cash alone."

The latest figures (to the end of August) show that the deficit of the 6,533 schemes covered by the Pension Protection Fund Index has increased by 75% in just one month to £117.5 billion, up from a deficit of £67.3 billion at the end of July.

Adds Jonathan Cornthwaite, one of Wedlake Bell's IP partners, who also spoke at the seminar: "Investment by British business in IP and other intangible assets has outstripped investment in tangible assets for each of the last ten years. This is a huge resource that pension trustees have hardly started to tap."

Clive Weber comments that the pledging of IP to pension funds can be significantly more attractive to the pension scheme than a promise of future cash. The problem, he explains, is that the cash promise becomes worthless if the sponsoring employer becomes insolvent. "In contrast", Clive Weber adds, "IP may well retain a great deal of its value even if the company paying to use it ceases to trade."

"What is more, the valuation of intangible assets by valuation experts is becoming increasingly sophisticated, and the secondary market for this IP is now more liquid."

Wedlake Bell say that £8billion in non-cash assets were pledged to pension funds through "Asset Backed Funding Structures" in 2010, and that this is expected to rise to £10billion in 2011.

The speakers at the seminar, held at Wedlake Bell's London offices on 13 September, included Wedlake Bell experts on pensions, Justin McGilloway, corporate tax, Mike Ridsdale and Kelvin King of BNP Paribas as the expert on IP valuation.

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