CFOs Fund Pension Plans With Intellectual Property

In "How Creative CFOs are Funding Pension Plans with IP" (Valuation Researcher Alert, June 2011), its authors describe how some Chief Financial Officers are transferring intellectual property assets to their respective pension plans. To add up to 275 million Great British Pounds to its UK defined benefit plans, "TUI Travel PLC is utilizing a partnership arrangement, backed by its Thomson and First Choice brands."

The idea is novel as was Diageo's use of "whiskey" assets to top off its retirement plan funding status. See "Diageo pledges whiskey against pension deficit" by Cecilia Valente, Reuters, July 1, 2010.

As with any "hard to value" security, there is merit in using an independent third party appraiser who can objectively incorporate risk factors in projecting future expected cash flows associated with an intangible asset like a trademark or patent.

Increasingly, expert work with which I am involved has focused on questions about whether an illiquid instrument was properly valued. As I stated during my September 11, 2008 testimony on this topic before the ERISA Advisory Council, bad valuations and related poor policies and procedures can have a costly domino effect because valuation numbers directly impact asset allocation and risk management decisions over time, not to mention fees that are paid to service providers. This is not good news for fiduciaries who are already faced with numerous challenges, each of which puts them squarely in the spotlight of regulators and litigators who see many ERISA plans as needing to do much more in the way of best practices. In the United States, should the U.S. Department of Labor expand its definition of a fiduciary to include appraisers, it may discourage valuation professionals from working with ERISA plans. This itself could be a problem.

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