INTRODUCING THE STREAMLINED ESCROW FOR PENSIONS
A cost-effective, time-efficient way to set up an escrow.
“Many of our clients want something quick, easy and cost effective to set up. Our Streamlined Escrow for Pensions is just that.”
Katie Peto
LCP Partner
Escrows have become increasingly popular contingent funding options thanks to their flexible nature and ability to satisfy many different objectives. They can be an attractive option for both trustees and sponsors, as well as for both under-funded and well-funded schemes.
Some examples of how an escrow can be used to support a pension scheme include:
- An escrow can be used to help bridge any gap between the trustee and employer views on funding assumptions or investment strategy. For example, the additional security provided could enable the scheme to take more investment risk, with the escrow funds being available to compensate the scheme if these risks don’t bring the hoped-for returns. At the same time, any upside returns could mean the sponsor can get its money back.
- For well-funded schemes, an escrow can be used to help prevent “over-funding”. This could mean avoiding a trapped surplus on wind-up, with the corresponding tax charge on a refund of surplus. Escrows are increasingly being used to manage these risks for full scheme buy-ins, where there is often an unknown deferred premium adjustment following a period of data cleanse. More generally, a sponsor may wish to aim for no more direct scheme contributions once a given funding level is reached.
- In light of Covid-19 and cost of living related market and covenant effects, the recent RPI reform announcements, and the effect of recent court cases on the Pension Protection Fund (PPF), there will be a renewed expectation of materially higher PPF levies for some schemes (despite the average levy falling). Certain PPF-approved contingent assets, including charged escrows, can be structured to help reduce the PPF levy and in some cases will now yield much bigger levy savings than before.
Whilst some situations will merit and require the time and resources to set up a more complicated (and by definition more expensive) structure, many of our clients want something quick, easy and cost-effective to set up.
We have therefore worked with BNY Mellon as Escrow Agent and Travers Smith for legal advice to design the Streamlined Escrow for pensions.
The Streamlined Escrow provides the following advantages for sponsors and trustees over approaching the open market directly:
- Quick and efficient set-up: the pre-designed contract helps you get a competitive deal without the lengthy negotiations that would be required to secure similar terms in the open market.
- Certainty on fees: the one-off fixed set-up fee includes all initial set-up costs with the escrow agent BNY Mellon.
- Flexible investment options: there are no minimum or maximum contributions, or limits on the number of contributions or withdrawals that can be made to / from the escrow. You can choose whether to invest the escrow assets in cash or in one of a number of well-known money market funds.
Read more about Escrow accounts and reservoir trusts here and about how our Streamlined Escrow helped World Duty Free Group reduce cash contributions to its pension scheme while providing additional security to members here.
"Travers Smith are delighted to have worked with LCP on the development of this innovative yet straightforward and user-friendly escrow product, which will no doubt be of interest to many clients in this space."
Jonathan Gilmour
Travers Smith
“I’m pleased to have successfully implemented several Streamlined Escrows since we launched this product with more in the pipeline.”
Katie Peto
LCP Partner
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