David Davison discusses the possibility of securing your charities’ intellectual property against your pension liabilities.
Charities are continuing to explore ever more innovative ways to increase income and assets and manage their finances. They are also looking for ways to deal with ever-increasing pension deficits.
Some innovative options which are now becoming more mainstream within the private sector may also be worth exploring for the charity sector. Major UK commercial names such as M&S, Diageo, GKN, Philips, John Lewis, TUI and Britvic have all recently moved to address pension funding with the use of intellectual property (IP) and intangible assets. So what are these?
Kelvin King of valuation specialists Valuation Consulting Co explains that “intellectual property includes trademarks, brands, databases and customer intangibles. This is acknowledged as the dominant asset of most businesses and is something which is particularly strong within the not-for-profit sector with charities owning significant amounts of IP.”
However, accounting is biased against intangible assets and intellectual property as it generally cannot be included on balance sheets, even though it is property like any other asset.
In February 2009 the Institute of Administrative Management said: “Intangibles are not coming up in public statements, hearings or probably conversations in general with respect to dealing with the financial crisis. This is despite the business reality that 75 per cent or more of most companies’ value, sources of wealth, sustainability and future wealth creation are directly linked to them.”
IP as security
The market for alternative financing solutions is becoming ever more standardised with organisations looking for alternatives to providing large amounts of cash or even parent guarantees. Pension scheme trustees are increasingly willing to accept trademarks, database rights and copyright as security against pension liabilities. Diageo added maturing whiskey to its pension fund.
Charities tend to have highly valuable trademarks and customer databases and could derive a value from these over and above what is shown in their accounts. Looking at IP could also encourage charities to make better use of the inherent value such as by partnering with ‘like-minded’ commercial organisations to develop income.
The valuation methodology for IP can follow the same tried and tested International Financial Reporting Standard basis that provides pension trustees with valuation methodologies accepted by regulators and audit firms.
The approach is only really attractive for standalone pension schemes as it is problematic to implement with multi-employer pension schemes. Depending upon the level of IP available it could even encourage larger charities to look to move away from multi-employer schemes.
With the difficulty charities have raising funds to pay pension deficits this may be an additional area worth exploring further.
