ALL OPTIONS

For DB pension schemes, we summarise the "basics" of the most common contingent funding mechanisms, including when you might use them and the advantages and disadvantages of each option.

CONTINGENT CONTRIBUTIONS

Funds are transferred from the sponsor to the scheme based on pre-determined triggers.

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ESCROW ACCOUNTS AND RESERVOIR TRUSTS

Funds are held by a third party but ringfenced for the pension scheme. Funds are transferred into the scheme or back to the sponsor based on pre-determined triggers.

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GROUP COMPANY GUARANTEES

The parent, or another group company, makes a legally binding commitment to provide support to the pension scheme in certain circumstances.

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LETTERS OF CREDIT

A guarantee from a bank with a strong credit rating to make a payment to the scheme on certain pre-agreed trigger events, in return for a premium from the sponsor.

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SURETY BONDS

Similar to letters of credit, however the guarantee is provided by an insurer instead of a bank.

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DIRECT ASSET TRANSFERS

A transfer of non-cash assets, conditionally or unconditionally, from the sponsor to the scheme.

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CHARGE OVER ASSETS

The scheme receives a fixed charge over a specific asset (or assets) of the sponsor.

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ASSET BACKED FUNDING

The sponsor either funds the purchase of assets or transfers assets to a Special Purpose Vehicle (SPV) that is jointly owned by the sponsor and the trustee.

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NEGATIVE PLEDGES

A promise by the sponsor not to undertake certain actions, either without the consent of the trustees or without undertaking a connected triggered action.

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DIVIDEND SHARING MECHANISMS

Specifies the additional contributions payable to a scheme dependent on the level of dividends the sponsor pays.

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