INTRODUCTION
Contingent funding solutions for DB pension schemes can be a great way to protect member benefits, as well as other stakeholders of the sponsoring employer. It is therefore very important for both sponsors and trustees to understand the range of options available.
Contingent solutions can take a variety of forms, but they generally involve the sponsor agreeing to contribute more to its pension scheme if certain triggers are reached in return for less upfront cash to the scheme.
Some of the more common arrangements include:
- Contingent contributions, based on funding and/or covenant triggers.
- Escrow-type accounts, which hold funds that can be drawn on by the pension scheme and the sponsor in certain circumstances, but are not actually held within the scheme.
- Parent or related company guarantees, where additional funding is provided by the related company if the immediate sponsor is unable to pay.
- Asset-backed funding, where the scheme has a claim over an asset if needed.
- "Guarantees” provided by banks (letter of credit) or insurers (surety bond).
- Upside profit sharing, dividend sharing, and negative pledges.
This handbook:
- Summarises the “basics” of the most common contingent mechanisms, in a reference section.
- Provides a number of case studies to illustrate the solutions that are being applied to a wide range of different situations.
- Helps you understand what content might be most relevant to you in What's best for me?
"Contingent funding arrangements have been around for a long time, but they are now more mainstream and are being used in a huge range of circumstances. These range from schemes in long-term run-on generating surplus, to schemes on the verge of full insurance, and those with large deficits combined with covenant or cashflow pressures. In all cases, trustees can get the assurances they need about future funding while sponsors are able to concentrate their available resources on making sure the business is still there in the future."
Phil Cuddeford
LCP Partner