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 employer sponsor agreeing to contribute more to its pension scheme if certain triggers are reached in return for less upfront cash into a DB pension scheme.
This report will explain how these arrangements are rapidly moving from niche to mainstream because of a wide range of regulatory, financial and macroeconomic drivers.
We also set out innovations in this evolving area, explore the key issues trustees and sponsors should be aware of, and summarise the basics of the most common contingent mechanisms, and more to help you understand what solution might be best for your scheme.
Contingent funding handbook
Read nowContingent funding arrangements are set to become far more mainstream, and should be considered by every trustee board and sponsor.
Phil Cuddeford LCP Partner
Some of the more common contingent funding 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 parent 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 or insurers; and
- Upside profit sharing, dividend sharing, and negative pledges.
In this handbook we:
- Explain why these approaches are becoming so much more mainstream;
- Discuss emerging innovations and best practice in this fast-evolving area;
- Introduce LCP’s Streamlined Escrow solution to help sponsors and trustees get the most out of escrows in the most time-efficient and cost-effective way;
- Provide a number of case studies to illustrate the solutions that are being applied to a surprisingly wide range of different situations;
- Discuss the “nitty gritty” issues that are needed to avoid regret risk of a contingent solution that the sponsor and/or trustees subsequently wish to unwind but can’t;
- Summarise the “basics” of the most common contingent mechanisms, in a reference section;
- Provide our key predictions throughout this handbook for this fascinating and growing area over the next five years; and
- Help you understand what content might be most relevant to you.
