TUI's innovative new pension fund recovery plan, which makes use of intellectual property, has won the approval of its trustees and unions, the firm has told Pension Funds Insider.

The travel firm is to put in place a 2.5% cap on future pensionable pay increases as it seeks to make around £12m savings from future service changes to employees. David House, the travel group's reward director, said "this cap was explicitly agreed with unions before we went to consultation and both unions balloted to agree this."

Another £26m or so (two-thirds of annual £38m savings) will be provided by sponsor funding. This will land in the accounts of TUI's pension funds via an unusual route.

Four of the TUI's six schemes (acquired in various mergers and acquisitions) are to merge making operational and administrative savings. The three surviving schemes are then to take a limited interest in a new partnership which will own the group's Thomson and First Choice holiday brands.

The sponsoring group will then pay 1.65% of its annual turnover to the new partnership as royalties for using the well-known brands, and £16.5m will be paid by that partnership to the pension schemes every year until 2026.

Holding the brand rights to Thomson and First Choice is worth at least £305m according to an intellectual property valuation from BNP Paribas and Intangible Business. These rights can therefore act as collateral should the group stop making the royalty payments for any reason.

Should the pension schemes still be in deficit in 2006, TUI has promised a cash injection to plug the gap, up to the value of £275m.

"This provides substantially increased security for the pension scheme and its members in terms of pensions accrued to date," said House. Marks & Spencer and Diageo both recently put collateral into a pension recovery plan in the form of property and whisky, but this is believed to be the first time that intellectual property has been used to shore up a pension scheme.

House added that as well as reassuring trustees and scheme members, TUI's creative plan protects the sponsor from the danger of overfunding the pension scheme should good performance bring it back to health sooner than expected. House said: "Had we not done this, an existing arrangement with our schemes said we would make good the full £400m deficit over seven years, which would have potentially carried the risk of moving into a position of surplus on an ongoing basis. That would have been an inefficient use of cash for our business, which has a very distinct cash profile."

TUI are confident that the changes will allow their pension schemes to remain open to future accrual (having all closed to new members by 2008) as they amount to "the same savings as closing the scheme to future accrual and have avoided the difficulties in industrial relations that one might expect in closing the scheme", says House.

First published: 19.05.2011

dbillingham@wilmington.co.uk