Pension-led funding: Myths and Facts

There are plenty of myths and legends surrounding pension-led funding, particularly when linked to Intellectual Property (IP). We lay a few of them to rest.


Pension-led funding is a sophisticated form of commercial finance which offers an alternative to traditional business funding, such as bank loans or overdrafts, and involves using business owners’ accrued pension funds to invest in their own companies.

According to Clifton’s research, almost three quarters (73 per cent) of business owners are unaware that they can source finance directly through their own pension funds. This is particularly true for smaller businesses (2-5 employees) and those established after the year 2000.

No. While some companies may use IP-based pension-led funding as their only source of business finance, for many it is a complementary source that works well alongside traditional lending options.

In fact, Clifton Asset Management is now working closely with bank advisers to encourage them to add pension-led funding to their portfolio.

According to the Clifton research, currently 55 per cent of businesses would still turn to their bank for advice on alternative forms of business funding, with 49 per cent talking to their accountant.

Only 23 per cent would turn to an IFA or pension adviser and just six per cent to a commercial financial advisor.

Pension-led funding is only applicable to pensions owned by business owners, directors and/or senior executives. Thus, in every case, pension-led funding has no impact on pensions run on behalf of a business’s workforce.

Pension-led funding is included as part of the running of a registered pension scheme. These are established under a trust, with the trustees usually being the stakeholders in the business.

It is advisable to appoint a professional administrator to support the trustees in the exercise of their duties and all trustees have a legal duty to ensure governance and decisions are in the best interests of the scheme.

When it comes to risk, every company and its directors has to accept some element of risk as part of the general nature of running a business.

However, pension-led funding is a controlled, rather than uncontrolled risk. A third party loan only remains viable for as long as the third party is willing to supply the money and support the business.

If they decide they want their money back – and this can be for reasons over which the business owner has no control – the business will be forced to find the balance of the loan, often with immediate effect.

The majority (52 per cent) of businesses surveyed by Clifton perceived that, of the main forms of finance available, a bank overdraft or bank loan has the greatest risk, while only four per cent viewed pension-led funding as posing the highest risk.

The risks associated with this are comparative to traditional commercial lending, therefore, any lending decision will be based on the viability of the underlying business and its ability to service its financial responsibilities.

However, Pension-led funding does offer a natural and positive incentive for success, as part of the directors’ and/or business owners’ future pension has been used to fund their present activities.

Although protected from external creditors, the pension scheme is often a creditor in itself to the business so, in the event of the company defaulting, the pension scheme may suffer a loss.

In the extremely rare circumstances that a pension scheme has to be written-off entirely, the only cost is the money that has already been paid into the business.

This has to be set against traditional funding methods and funding by a third party. Not only would directors be liable to pay back the loan, but other personal assets – such as the family home - may also be at risk.

Intellectual Property (IP) is one of three elements of intangible assets that contribute most of the value to businesses in the UK and worldwide. Pension-led funding recognises this. Common types of IP include patents, trademarks, designs, copyright, databases and trade secrets. The other two elements are Intellectual Assets (such as know-how and processes) and Intellectual Capital (such as brand, reputation and market positioning). HMRC offers the following definition of IP which encompasses:

  1. Specified intellectual property rights that are recognised and protected under UK law, together with equivalent rights under foreign law. Patent, trademark, registered design, copyright (which includes rights in computer programs and databases) or design right, and rights in respect of plant varieties are specified in this way
  2. Any information or technique having economic value but not protected by a right under (a) above, for example knowledge of an industrial process that is not generally available
  3. Any licence or right in respect of property rights, information or techniques within (a) and (b) above
http://www.hmrc.gov.uk/manuals/cirdmanual/cird11150.htm: CTA09/PART8/S712

In 2010, the World Bank estimated that royalty and licence fees alone generated £5.25 billion in the UK, while as far back as 2005, US IP was measured at $5.5 trillion. Until the Finance Act 2004, IP - classed as an intangible business asset - was not accepted by most lenders as collateral.

However, in research conducted by Clifton Asset Management (Clifton)[1], 84 per cent of UK businesses questioned value their IP at zero per cent. Within specific business sectors, 96 per cent of the hotel and catering sector believe they derive no value from IP, 92 per cent of the retail sector and 91 per cent of the transport and communications industries. In all, only six per cent of businesses value their IP at anything more than ten per cent of business worth.


[1] Business-to-business research specialists, BDRC Continental, conducted 451 telephone interviews between 8th and 18th May 2012 with SMEs (businesses with up to and including 250 employees) all with a turnover exceeding £50,000. Quotas were set by size, region and sector and the data weighted to the profile of UK businesses. The respondent in each case was a senior financial decision-maker; generally the owner or managing director of smaller businesses and the financial controller of larger businesses.

The main issue in implementing IP-based pension-led funding is an inability to obtain a formal valuation on a company’s IP.

There are a number of reasons for this including the track-record of the business, a lack of clarity on specific elements of IP, or a lack of business planning or financial reporting.

Once implemented, IP-based pension-led funding can suffer from two main issues. The first is if the IP needs to be sold and no potential external purchaser is prepared to pay a similar amount for the IP to that paid by the pension scheme in the original transaction.

In essence, there may not be a secondary market for the IP in the way there would be for property or shares.

The second issue is the perception of increased complexity in the event of a sale of the business, or retirement of a pension scheme member.

This is because of the value of the IP and the relationship of this value between the business and the pension scheme.

While this relationship needs to be unravelled at the time of sale or exit, history and experience indicates that the outcome of using pension-led funding is normally advantageous to all parties.

Yes. This was established as part of the changes resulting from the Finance Act 2004. Subject to expert validation and due diligence, IP is a recognised and acceptable asset class that can be used in Pension-led funding and is regulated by HMRC.

However, the Clifton research shows that only 17 per cent of respondents feel IP is a suitable asset for a director’s pension to buy, while almost half (44 per cent) are unsure or do not know its suitability.

Surprisingly, only five per cent of businesses in the Arts and Leisure sector feel IP is a suitable asset. Of the 37 per cent of businesses specifically stating that IP is not a suitable asset, the main reason given is, again, lack of knowledge or understanding of IP and its role in Pension-led funding.

The most common tend to be trademarks, brand and company logos. However, there are a wide range of other elements which can be used in Pension-led funding.

Intellectual Capital

Intellectual Assets

Intellectual Property

  • Patents

  • Trade Marks

  • Designs

  • Copyright

  • Databases

  • Trade secrets

  • Un-recorded inventions

  • Key skills

  • Know-how

  • Process

  • Market data

  • Information

  • Positioning

  • Reputation

  • Branding

  • Relationships

  • Contracts


Acceptable IP is valued in accordance with recognised standards, requires thorough due diligence and involves specialist calculation by independent IP valuers.

There are three main approaches to valuing IP:

  1. Cost – What has already been invested and how much of the IP is still valid. Often, a software business’s IP includes obsolescence and the cost is only in the coding.
  2. Market – At what price have other people sold something similar? This can be difficult for technology markets because confidential information cannot be used as part of a valuation. Google acquired Motorola for $12.5 billion but it was largely for the 17,000 patents held by the company, rather than for the handsets.
  3. Income – What can the IP earn in the future? For example, how credible is the projected future success of a patent. Generally it’s easier to make forward projections for a company that has an established business, founded on good assumptions from a sound track record, with a firm grip on costs and profitability. Uncertainties have to be built into every valuation and valuations will usually appear more conservative for start-ups or newer companies where more uncertainties naturally exist.

There are two main approaches to using IP in this way. Either the IP can be purchased by the pension fund from the business, thereby releasing funds, or be used as security for a loan by the pension fund to the company.

In both cases, worth has to be determined by an independent IP valuation.

There are a number of clear benefits of IP-based Pension-led funding. These include:

  • An innovative funding opportunity for many SMEs that provides an alternative to traditional funding methods.
  • The business’ IP is held within a pension environment, so it is protected from creditors.
  • Any future appreciation in value of IP held within a pension fund, or income derived from it, is free from direct taxation.

Unlike tangible assets, which inevitably depreciate in value over time, IP is generally expected to appreciate in value in line with the company’s continued growth.

However, if there is depreciation in the IP value, there will be a commensurate fall in the value of the pension scheme.

By law, the pension scheme is distinct from the business.

Therefore, the pension trustees can choose to sell the IP independently of the business; sell it back to the business for sale as part of the company acquisition, or retain the IP within the pension scheme.

The options require tax planning advice, but the tax burden, as a result of using pension-led funding, should never be worse than neutral and is often positive.

There have been a very small number of articles that have been somewhat negative about using IP for Pension-led funding over the last few months. This is largely due to a poor understanding of a highly specialist (albeit increasingly mainstream) issue.

The principal focus of these articles is the veracity of IP valuations, which are prepared specifically to facilitate IP-based pension-led funding.

It is essential that valuations are conducted by independent professionals whose business is to provide expert analysis of IP – of which there are very few in the UK - not least because these valuations and reports are often relied upon to support company mergers/acquisitions, business disposals, the resolution of shareholder disputes and other legal and financial issues.

Amongst Clifton’s panel of valuers are experts who are sometimes called upon by HMRC as advisors in IP-related issues or professional witnesses in tax investigations due to their robust methods and practices.

According to the CBI publication Future Champions – unlocking growth in the UK’s medium sized businesses, small businesses (with turnover of less than £10 million) account for 99 per cent of all UK registered businesses, generate 36 per cent of total turnover and employ 48 per cent of business employees.

Around 40 per cent of the UK’s SME owners have funds in pension schemes which could be immediately deployed through IP and pension-led funding. This would create an estimated cash injection of £100 billion into the UK’s SME economy.

The Department for Business Innovation and Skills (BIS) set up a Taskforce in 2012 to examine improving access to non-bank debt. Clifton Asset Management made a submission to the Taskforce in which it stated:

“In the past 15 years we have already introduced nearly 1,000 of them [SMEs] to this previously untapped source of finance, with an average amount of finance raised of £120,000. In the process this has created, saved or stabilised some 10,000 jobs or more. We believe that with the right support from government this market could reach many, many more.”